The procedure for managing liquidity

1. General provisions 

1.1. Present regulations define the procedures for management over liquidity risks for ensuring "Premium Bank" ojsc (hereinafter referred as «bank») in full and timely implementation of its liabilities, efficient management over resources and maintenance of limits set by management board of bank. 

1.2. Present regulations regulate followings: 

  • the procedure for preparation of report forms, so that mainly in accordance with these forms decisions on management over resources for short and long-term periods are made. 
  • definition of procedures for classification of liquid resources and their formation for the purpose of settling liquidity gaps; 
  • definition of liquidity risks used for implementation of control over risks in respect of bank subjects and bank as a whole; 
  • the procedures for making decisions in case of funds deficit / surplus related to normal or force-major circumstances. 

1.3. Treasury department implements control over the performance of regulations on management over liquidity risks at bank by bank collegial management bodies (aeoc, management staff). 

1.4. The managers of bank subjects are subordinated to bank treasury department managers and consequently bear responsibility for decisions made by aeoc in accordance with present regulations. 

1.5. The procedure for provision of bank business divisions with funds and volume of these funds are defined by separate documentation. 

1.6. In liquidity management basic principles mentioned below are based on: 

  • management over risks is implemented according to the plan on flow of funds (cash-plan); 
  • hedging of liquidity risks is implemented by way of formation of liquid resources; 
  • management over liquidity risks is implemented based on funds deficit / surplus, according to the cash-plan for subjects and generally bank and by method of definition and control over liquidity gaps in conformity with reports on liquidity gaps for medium and long-term periods (gap-report - general adopted accounting principles report); 

1.7. Project division – treasury. 

2. References to statutory regulations 

The procedure for provision of "Premium Bank" ojsc branches with funds 

Rules and regulations «about treasury department» 

Regulations on «liquidity management at commercial banks» (№137-nba 29-12-1999) 

3. Terms and definitions 

Bsс – bank separate subjects (branches and departments of "Premium Bank" ojsc) 
Planning period – time interval between report date and last planning date 
Treasury – treasury functional structure division of "Premium Bank" ojsc 
Treasury divisions – divisions performing treasury functions at bank 
Expenditure centers (functional divisions) – bank structural divisions not performing bank own and / or clients’ operations 
Methods – methods of calculation of stable balance for funds attracted to "Premium Bank" ojsc
Nbsc – separate divisions (subjects) occupied with bank non-bank activity subject to classification according to type of business activity: insurance, leasing matters etc. (all companies of "Premium Bank" ojsc excluding its branches and departments). 
Profit centers (business divisions) – bank structural divisions implementing bank own and / or clients’ operations.Divisions – any bank structural division (profit center and expenditure center). Bank subjects – all bank and non-bank subjects of the bank (that are branches of "Premium Bank" ojsc and its other companies). 
Related attraction – attraction of funds from outside organizations for the purpose of crediting clients, but in this case the amounts and terms of attracted and placed funds coincide. 
Dealing office – dealing office of treasury division on treasury operations at commercial markets. 
Accounting-operational systems – «progress» and other systems installed at bank.
Cash plan – plan on flow of funds projected at bank by bank subjects and treasury department.
Gap-report – report on liquidity gaps. 

4. Indications and abbreviations 

Bank – means "Premium Bank" ojsc (including all bank branches). 

Bsc - means bank subjects of bank. 

Nbsc – means non-bank subjects of bank. 

Treasury – means treasury operations group (treasury business trend). 

Orf – means obligatory resources fund. 

Bbc – means bank-to-bank credits. 

Emvs – established market on valuable securities. 

Ocp – means open currency position. 

5. Resource management 

5.1. General principles 

5.1.1. For the purpose of taking optimal decisions on management over resources for short and long-term periods the plan on flow of funds is drawn up (hereinafter referred as «cash-plan»). «cash-plan» is drawn up by bank subjects (bank subjects’ «cash-plan») and treasury department (bank «cash-plan»). 

5.1.2. Below mentioned items are based on while «cash-plan» is drawn up: 

  • receivables and pays-off as a result of termination of contract terms regarding requirements or obligations to and against third parties as well as subjects’ requirements and obligations to and against one another; 
  • probable receivables and pays-off; 
  • regular receivables and pays-off. 

5.1.3. As a «cash-plan» forecasts funds deficit / surplus, it is an instrument for making decisions on placement / attraction of cash and other commercial operations. 

5.1.4. The sources for drawing up «cash-plan» are as follows: 

  • data of accounting-operational systems; 
  • reports on presentation and payment terms of terminable instruments; 
  • analytical data provided by divisions on urgency of terms of contracts on terminable instruments; 
  • plans of divisions for attraction of terminable equities; 
  • plans of divisions for placement of terminable assets; 
  • forecasts made in respect of definite principles, methods; 
  • plans of divisions for receipt and payment of operational profits and expenses; 
  • plans of divisions for payment of non-operational expenses and taxes; 
  • forecasts of customer-related divisions on receivables and pays-off for current operation date; 
  • plan indicators approved by aeoc. 

5.1.5. Divisions of "Premium Bank"ojsc head office and nbsc submit data on operations to treasury in accordance with the procedures «on bank divisions’ data submission to treasury» (hereinafter referred as «procedure»). 

5.1.6. Divisions submit data on operations to treasury divisions. 

5.1.7. For the purpose of control over accuracy of planning results treasury division based on «cash-plan» implements calculation of variances from opening balance of plan for each day in accordance with total data on comparison of current plan with previous one. 

5.1.8. The responsibility for true and in time submission of «cash-plan» belongs to the chief of treasury division. 

5.2. General procedure for drawing up «cash-plan» 

5.2.1. «cash-plan» is made in azn, euro and us dollars (including precious metals and other currency values in the equivalent us dollars amount). 

5.2.2. Scale – thousand pieces. 

5.2.3. 1st stage – loading and correction of opening balance: 

5.2.3.1. Opening balance is generalized according to groups specified in the form of report given in text of appendix 1. 

5.2.3.2. For the purpose of elimination of accounting features damaging economic essence of operations the correction of opening balance is implemented (for example, payment bank-bills expressed in currency before determination of note-clause in relation to effective payment, peculiarities of currency discharge accounting etc.). In addition to above mentioned the correction of opening balance in respect of optimization measures taken for the purpose of adherence to prudential standards is carried out. 

5.2.4. 2nd stage – accounting of operations: 

5.2.4.1. Operations on placement (assets) 

1) liquid assets / funds in settlement banks for the bank – the flow of funds is expressed at correspondent account and nostro main currency accounts at acb. The balance is retained at minimum required level and the amount of that minimum level is defined by treasury division management (the chief of treasury). 

2) liquid assets / funds - the planning of cash balance and flow of funds for current date is performed in accordance with the plan on cash operations. In prospect, the amount of cash balance for rest time until the end of planning period is retained at the level of mean rate calculated for last 30 calendar days. 

3) liquid assets / nostro accounts 

Write-off of funds from nostro accounts is carried out at first day of planning period. 

4) liquid assets / funds at bbme 

Flow of funds is expressed according to reports adopted and approved in correspondence with the rules. 

5) liquid resources 

Generally for bank – in case of not complete formation of resources, the increase of their volume up to required level is expressed due to rest liquid assets. 

6) forms 

Change of volume is expressed in conformity with primary calculations based on volume of additional arrangement / return. 

7) settlements with bank subjects 

A) current settlements – with reference to bsc these ones are reflected in flow of funds for bbsc accounts subject to taking into account probable overdraft at branch-to-branch settlements (bbs) account. 

B) funds presented by bsc may be formalized as both branch-to-branch resources and bank-to-bank credits. Dependently from destination resources may be divided into below mentioned categories: 

  • commercial, investment and discount resources – contract conditions are mainly recorded according to registration conducted in financing system; 
  • set-up resources (compensation of expenses or profits, taxes, funds) – are planned in accordance with predictions on profits or expenses, changes occurring in amount of tax anticipations and other factors. Planned placement of resources is expressed only in case of availability of treasury affirmation in respect to that act. 

8) operating assets / bbc operations are expressed as a receivable when operations are over based on data submitted by divisions in accordance with the procedure. 

9) operating assets / valuable securities portfolio 

A) valuable securities, depending on the purposes they are purchased for, are divided into following portfolios – trading portfolios, investment portfolios. The planning of flow of funds in respect of transactions with valuable securities portfolios is carried out in correspondence with data submitted according to the procedure and limits of financing approved by aeoc. 

B) coupons and dividends – in correspondence with data submitted according to the rules. 

C) settlements regarding transactions with valuable securities – in accordance with present item repo operations, flow of funds in respect of emvs, expression of other settlements are carried out. 

10 operating assets / credit portfolio - flow is expressed based on data regarding credit divisions’ payments in respect of credits, repeat crediting and extension of terms for credit debts according to the procedure as well as separate decisions approved by aeoc and having effect on the amount of credit portfolio. Submitted overdrafts are expressed in accordance with medium volumes based on statistic data on bank. 

11) letters of credit / flow of funds are expressed in correspondence with data submitted according to conditions determined in conformity with the procedure. 

12) operating assets / conversion operations for «expenditures» item – receipt or outflow of funds is performed according to data submitted in respect of factual forex, swap, forward transactions in conformity with the conditions determined in accordance with the procedure. For ocp item - - in balance of receivables the balance at short position on the currency, on which report is made, is noted as ocp.

13) total flow of funds on «funds in settlements» and «other assets» is expressed based on reports submitted and approved in conformity with the procedure. 

5.2.4.2. Operations on attraction (equities) 

1) funds attracted from clients / funds attracted until need - planning on flow of funds is performed based on data submitted by divisions in accordance with the procedure and methods. 

2) funds attracted from clients / terminable obligations, letters of credit 

A) all terminable liabilities (including balances at different types of accounts not reduced before need) are expressed within the term, during which the operations informed about by divisions according to the «procedure on pay-off» are over. 

B) for planning period by means of amounts of receivables a balance at level of stable balance without risk is provided in case of a gap in attraction instruments group in accordance with the methods and valid limits for operations. 

C) in conformity with data submitted according to the procedure non-recurrent amount attracted from high profile customers are expressed in plan. 

3) treasury operations 

A) all operations are expressed within the terms, during which operations informed about by divisions according to the procedure are over. 

4) settlements with bank subjects 

A) current settlements – for bsс, in case there are funds in balance, they are planned to be completely written-off on first working day (subsidiary banks, loro-nostro accounts come out as bbsc analogues). 

B) the funds attracted from bsc may be formalized as branch-to-branch resources or bank-to-bank credits: - commercial, investment resources and discount resources are registered in plan in accordance with the conditions of contract recorded in financing system; set-up resources (expenditures or compensation of profit, taxes, funds) are planned in accordance with forecasts on profits or expenditures, change occurring in amount of tax anticipations and other factors; in «cash-plan» of bank present item resources are expressed in accordance with forms and subjects based on forecast regarding change of their amounts. The attraction of resources in correspondence with plan is expressed only, if those acts are approved by treasury. 

5) schemes: 

In present item optimization measures are expressed. 

6) total flow of funds on «funds in settlements» and «other assets» is expressed based on reports submitted in conformity with the procedures. 

7) ocp - in balance of incoming funds balance at short position on the currency, on which report is made, is noted as ocp. 

5.3. «cash-plan» of bsс 

5.3.1. Form – appendix 1 

5.3.2. Planning period - 3 months 

5.3.3. Project division – treasury division of bsс 

5.3.4. Frequency of drawing up – every day 

5.3.5. The electron version is submitted to treasury no later than 12.00 a.M. By baku time. 

5.4. «cash-plan» of bank 

5.4.1. For the purpose of management over flow of funds at bank 

5.4.1.1. Form – appendix 1 

5.4.1.2. Planning period – 3 months 

5.4.1.3. Project division – treasury 

5.4.1.4. Frequency of drawing up – every day 

5.4.1.5. Formalized as the plan on flow of funds for "Bank silk way" ojsc and emvs correspondent accounts, if internal arrangement between bank subjects is expressed. The data submitted by divisions in accordance with the procedure is applied as a data source. 

5.4.2. For the purpose of management over structure of bank assets and equities 

5.4.2.1. Form – appendix 3 

5.4.2.2. Planning period – until last contract date 

5.4.2.3. Project division – treasury 

5.4.2.4. Frequency of drawing up – every week 

5.4.2.5. As a whole formed as total plan on flow of funds for bank. There are expressed all third parties’ requirements and obligations as well as requirements and obligations against them, but excluding requirements and obligations submitted by one subject to another one in calendar manner. As for other conditions, the procedure of formation complies with procedure determined for «cash-plan» of bs. 

6. Liquid resources 

6.1. General principles and definitions 

6.1.1. For the purpose of management over liquidity risk «liquid resources» concept is applied at bank. 

6.1.2. Depending from frequency of discharge from operating assets liquid resources are divided into four types: 

- I-stage liquid resources – funds at correspondent account at acb, funds at nostro accounts at commercial banks, cash in the amount above minimal limit, funds at exchange house. 

  • ii-stage liquid resources – amount of open nets available at bbc market may be used for the purpose of operative regulation over current liquidity. 
  • iii-stage liquid resources – resources formed in the form of valuable securities portfolio. 
  • iv-stage liquid resources – resources formed due to bank capital funds. 

6.2. Hedging of liquidity risk is executed based on below mentioned principles: 

6.2.1. Ensuring bank current payment capacity I-stage liquid resources are expressed in «cash-plan» report. 

6.2.2. Not used rest ii-stage liquid resources are used to prevent short-term liquid gap and they ensure bank payment capacity in case of variances from forecasted limits. The amount of those resources is determined in accordance with the data on amounts of most probably possible bbc attractions use submitted by dealing office (pessimistic prediction). Dealing office submits data to bank treasury every week. 

6.2.3. Iii-stage resources are used for hedging of liquidity risk caused by not forecasted uncertainty and flow of equities. 

6.2.4. Iv-stage liquid resources are formed for the purpose of elimination of liquidity deficits in case of force-major circumstances. 

6.2.5. The requirements on liquid resources are determined based on the term, within which liquidity risk occurs. Assets portfolio conducting liquidity hedging is divided into three stages dependently from economic content of occurring risk.

Portfolio

Object of hatching

Instrument of hatching

Performance term

I stage

Variability of balances

I and II-stage resources

1-14 days

II stage

Variability tendency of stable balance

III – stage resources

up to 1 month

III stage

Emergency cases, force-major

IV  - stage resources

up to 14 days

6.2.6. The structure of III-stage resources is defined by Risk-Management and approved by AEOC in accordance with the Procedures «on formation and management over reserve assets». In conformity with approved limits for structure and terms the totality of investment declarations on hedging portfolio is determined. 

6.2.7. III-stage resources are used in accordance with Bank Treasury disposal and AEOC decision in case, if the event causing complete or partial liquidity risk occurs. 

6.2.8. The structure, formation and use of IV-stage resources are defined in accordance with temporary Regulations «on formation of IV-stage resources at "Premium Bank" OJSC balance» and other documentation regulating formation of IV-stage resources. 

6.2.9. The calculation of factual amount of IV-stage resources is carried out by Treasur in accordance with the Methods. The amount of RF indicator (factual resources formed for hedging of risks related with force-major circumstances) is determined until 25th day of last month of current quarter. In conformity with those calculations AEOC defines the amount of IV-stage resources for next quarter. 

6.2.10. The funding of IV-stage resources is implemented according to level of factual terms. The expenditures on financial results obtained from management over IV-stage resources and their funding are referred to general corporate expenditures. 

6.2.11. In case, if Bank inside subjects’ activity means creation of resources for the purpose of implementation of hedging of active transactions or obligations out of balance, the calculations and procedures on creation of those resources are approved in accordance with separate methods adopted by AEOC of the Bank. 

7. Standard-setting and control over liquidity risks 

7.1. General principles 

7.1.1. The control over liquidity risks is implemented by means of determination of limits in respect of liquidity gaps. 

7.1.2. Liquidity gap means appearance of mismatches between requirements and obligations in respect of terms. The amount of gap is defined as a difference between assets and equities in respect of requirement and payment terms. 

7.1.3. The objects of control are as follows: 

  • bs; 
  • as a whole bank itself. 

7.1.4. Depending from terms of liquidity risks occurrence, setting of standards is referred to below mentioned ones: 

  • short-term liquidity gaps – gap for planned period up to 1 month, 
  • medium and long-term liquidity gaps – gap for period up to 1 year. 

7.1.5. Generally limits for gaps in respect of bank are determined by aeoc in accordance with the calculations submitted by treasury. 

7.1.6. As for bank subjects the determination and calculation of limits for gaps are implemented by treasury by way of arrangement of general bank level between bank subjects. 

7.1.7. Limits are determined for each currency (russian ruble, us dollars and euro) in decisive and relative amounts and in the equivalent national currency as well. 

7.1.8. Limits on gaps are reconsidered each quarter or extraordinarily in case, if negative events at commercial markets occur. 

7.1.9. The control over maintenance of limits for liquidity gaps is implemented by treasury. 

7.2. Short-term liquidity gaps and procedures for control over them 

7.2.1. The volume of ii-stage resources comes out as a source for settlement of short-term gaps. 

7.2.2. For short-lasting period the control over bsc is implemented according to standard procedure (based on limits on gaap report). 

7.2.3. The control over limits for short-term gaps generally for bank: 

7.2.3.1. The scheme on funds surplus / deficit in «cash-plan» of bank is a source of the data on gaps. 

7.2.3.2. The control over limits for short-term gaps for bank as a whole is implemented by treasury daily and relevant information is submitted to the chief of treasury. 

7.2.3.3. In case limit is infringed, the information about this is submitted to deputy of chairman of management board, who is xm curator as well. 

7.3. Long-term liquidity gaps and the procedure for control over them 

7.3.1. Limits for gaps for the period from 1 month up to 1 year are determined by aeoc generally for bank and bank subjects occupied and not occupied with banking activity at bank. 

7.3.2. Limits for gaps are determined based on a range of quantity and quality criteria: 

  • the dynamics of attraction terminable instruments is referred to quantity criteria – the possibility to re-finance each attraction instrument; 
  • among quality criteria are quality of assets (returning of given funds, interest of placement, risk on large-scale debts), structure of client market (risk that high profile clients leave bank). 

7.3.3. Gaap report is used as a source of data on amount of gaps and lines up arranged in calendar manner requirements and obligations against third parties and third parties’ all requirements and obligations as well as subjects’ requirements and obligations against one another in conformity with relevant contract provisions. The exceptional categories are for, liquid resources and funds placed before need. 

7.3.4. The information on not meeting requirements regarding limits on gaap is submitted to the chief of bank treasury. In case, if infringement cases occur regularly, aeoc of the bank should be informed about this. 

7.3.5. For the purpose of maintenance of limits below mentioned measures are intended as a part of control over gaps in relation to bank subjects: 

- preterm (early) return of funds placed by subject at treasury (based on treasury consideration); - placement of funds at treasury according to available rates; 

- implementation of two opposite transactions: attraction of bsc funds to treasury and placement at treasury according to available funding degree. 

7.3.6. In case of fact on violation of conditions regarding limits for gaps determined for bsc, for each transaction day of limit infringement, the penalty in double scale of repeated financing is applied. 

8. The procedure on control over funds surplus / deficit 

8.1. The procedure for control over bank funds surplus / deficit 

8.1.1. The analysis of «cash-plan» made in respect of bank makes it possible to estimate factual status of relevant situation and regulate volume of gaps. 

8.1.2. Optimal situation occurs in case, if the quantity of total deficit or surplus becomes equal to l zero. In case amount of total surplus or deficit differs from zero: 

8.1.2.1. L > 0 – surplus liquidity. In this case treasury considers alternative variants for placement of free funds for supposed period of funds surplus. Then the chief of treasury acting within his authorities taking into consideration optimal version makes decision on use of those funds. If surplus of funds is permanent and covers more than 1 month period of time, the matter on use of funds is considered within the framework of process on management over assets and equities at bank. 

8.1.2.2. Treasury notifies the chief of treasury about situation occurred and works out measure for its regulation. The measures not being within the authorities of the chief of treasury are submitted for aeoc for consideration. These are as follows: 

Limiting or temporary stop of volumes of transactions on credits and other assets; 
Temporary stop of paying expenses. 
8.1.3. Management over assets and equities for more than 1 month period of time generally for bank is settled by aeoc of the bank within its authority. 

8.2. Force-major 

8.2.1. Situation may be considered as force-major one in conformity with aeoc decision made according to the information submitted by treasury. 

8.2.2. Treasury works out and applies the plan on measure for provision of liquidity in critical situation (hereinafter referred as «plan»). 

8.2.3. In case, if events occur in negative direction leading to liquidity deficit, for the purpose of provision of liquidity at bank the attraction of additional funds, measures on liquid assets sale in gap of limits in relation to activity of separate divisions are expressed in the plan. 

8.2.4. The plan is submitted to aeoc for approval. 

8.2.5. The heads of the divisions, where the measures intended according to the plan refer, are responsible for complete performance of those measures. 

8.2.6. The decision on completion of application of the plan is made by aeoc based on presentation of treasury. 

9. Final provisions 

9.1. Present regulations are approved by decision of supervisory board. Addendum and amendments to be made to it are as well executed by present body.

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