Pillar 3 Disclosures. Bank of America Merrill Lynch International Limited. As at 31 December 2014

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1 Bank of America Merrill Lynch International Limited Pillar 3 Disclosures As at 31 December 2014

2 Contents 1. Introduction 1 2. Capital Resources and Minimum Capital Requirement 4 3. Liquidity Position and Encumbered and Unencumbered Assets 9 4. Risk Management, Objectives and Policy Further Detail on Capital Requirement, Resources, Leverage and Liquidity Risk Additional Information on Remuneration Disclosure Appendices 40

3 List of Charts & Tables Figure 1. Summary of Key Metrics as at 31 December Figure 2. High Level Organisation Chart 3 Figure 3. Summary of Minimum Capital Requirement 5 Figure 4. Risk Governance Structure 12 Figure 5. Counterparty and Credit Risk Exposure Detail 26 Figure 6. Counterparty and Credit Risk Exposure by Credit Quality Step 27 Table 1. Capital Resources 4 Table 2. Minimum Capital Requirement 6 Table 3. Capital Surplus over Minimum Capital Requirement and Tier 1 Ratio 7 Table 4. Transitional versus Fully Phased-In Leverage Ratio 8 Table 5. Analysis of Assets 10 Table 6. Encumbered Assets/Collateral Received and Associated Liabilities 10 Table 7. Counterparty and Credit Risk Minimum Capital Requirement and RWA 28 Table 8. Counterparty and Credit Risk Exposure by Industry Distribution 28 Table 9. Counterparty and Credit Risk Exposure by Geographical Distribution 29 Table 10. Counterparty and Credit Risk Exposure by Residual Maturity and Average Value 30 Table 11. Counterparty and Credit Risk Exposure by Credit Quality Step 31 Table 12. Counterparty and Credit Risk Exposure Pre and Post Credit Risk Mitigation 32 Table 13. Counterparty and Credit Risk Exposure Credit Derivatives 32 Table 14. Impairment for Credit Losses 33 Table 15. Market Risk Requirement 33 Table 16. Regulatory Capital Resources Reconciliation to Audited Financial Statements 34 Table 17. Capital Instrument Features 35 Table 18. Common Equity Tier 1 Capital Instruments and Reserves 36 Table 19. Summary Reconciliation of Accounting Assets and Leverage Ratio Exposures 37 Table 20. Leverage Ratio Common Disclosure 37 Table 21. Split of On-Balance Sheet Exposures (excluding derivatives and SFTs) 38 Appendix I. Directors Board Membership and Experience 40 Appendix II. Capital Resources BAMLI Solo Disclosure 41

4 Glossary BAC Bank of America Corporation BAMLI Bank of America Merrill Lynch International Limited / the Company BANA Bank of America, National Association BIPRU Prudential Sourcebook for Banks, Building Societies and Investment Firms BRC Board Risk Committee CCR Counterparty and Credit Risk CET1 Common Equity Tier 1 COO Chief Operating Officer CQS Credit Quality Steps CRD IV Capital Requirements Directive IV CRR Capital Requirements Regulation CVA Credit Valuation Adjustment ECAIs External Credit Assessment Institutions EEA European Economic Area EMEA Europe, Middle East and Africa EU European Union FCA Financial Conduct Authority Fitch Fitch Ratings, Inc. GCFs Governance and Control Functions GCIB Global Corporate and Investment Banking GMRM Global Markets Risk Management GRCC Global Banking and Markets Reputational Risk Committee ICAAP Internal Capital Adequacy Assessment Process ILG Individual Liquidity Guidance IMA Internal Models Approach ISDA International Swap and Derivative Agreement LCR Liquidity Coverage Ratio LOB Line of Business MLIB Merrill Lynch International Bank Limited MLPF&S Merrill Lynch, Pierce, Fenner & Smith Limited MLUKCH Merrill Lynch UK Capital Holdings MLUKH Merrill Lynch UK Holdings Group Moody s Moody s Investors Service, Inc. PRA Prudential Regulation Authority PRR Position Risk Requirement Pru-Val Prudential Valuation Adjustment RCSA Risk and Control Self Assessment RMC Risk Management Committee RRC Reputational Risk Committee RRCC Regional Risk and Control Committee RWA Risk Weighted Assets S&P Standard and Poor s SES Stress Event Scenarios SPVs Special Purpose Vehicles SREP Supervisory Review Process the Enterprise Bank of America Corporation UK GAAP UK Generally Accepted Accounting Principles

5 1. Introduction

6 1.1 Overview and Purpose of Document This document contains the 31 December 2014 Pillar 3 disclosures in respect of capital and risk management for Bank of America Merrill Lynch International ( BAMLI or the Company ), (formerly Banc of America Securities Limited) and its subsidiaries (the Group ). All defined terms are found in the glossary. Capital Requirements Directive ( CRD IV ), the European Union ( EU ) legislation implementing Basel III, came in to effect on 1 st January 2014, mandating the quality of capital that firms are required to hold, introducing an EU wide liquidity regime and establishing leverage requirements. This legislation consists of three Pillars. Pillar 1 is defined as Minimum Capital Requirement, Pillar 2 Supervisory Review Process and Pillar 3 Market Discipline. The aim of Pillar 3 is to encourage market discipline by allowing market participants to access key pieces of information regarding the capital adequacy of institutions through a prescribed set of disclosure requirements. This document provides detail on BAMLI s available capital resources ( Capital Resources ) and regulatory defined Pillar 1 minimum capital requirement ( Minimum Capital Requirement ) for the Group. It demonstrates that BAMLI has Capital Resources in excess of this requirement and maintains robust risk management and controls. To further increase transparency, this document also includes information on BAMLI s liquidity position Bank of America Merrill Lynch International BAMLI is a wholly owned subsidiary of Bank of America, National Association, ( BANA ) and its ultimate parent is Bank of America Corporation ( BAC or the Enterprise ). BAMLI s activities form part of BAC s Global Banking and Markets operations in Europe, Middle East and Africa ( EMEA ). Clients include large multinational groups, financial institutions, governments and government entities and private equity firms. BAMLI's head office is in the United Kingdom. The firm has the ability to trade throughout the European Economic Area ( EEA ) and conduct business with international clients. The Company is authorised and regulated by the Prudential Regulation Authority ( PRA ) and the Financial Conduct Authority ( FCA ). As at 31 December 2014, BAMLI was rated by Fitch Ratings, Inc ( Fitch ) (A / F1) and Standard & Poor s ( S&P ) (A / A-1) BAMLI s Capital Position at 31 December 2014 Figure 1 illustrates BAMLI s key capital metrics. BAMLI s Capital Resources consist entirely of Tier 1 capital and the Group continues to maintain capital ratios and resources significantly in excess of its minimum requirement. Figure 1. Summary of Key Metrics as at 31 December 2014 ($bn) Section 1 : Introduction Note: All of BAMLI s Tier 1 capital is CET1, therefore CET1 Capital Ratio and Tier 1 Capital ratio are the same. Capital Resources and ratios reflect the inclusion of 2014 audited retained earnings. 1

7 1.2 Basis of Preparation The information contained in these disclosures has been prepared in accordance with regulatory capital adequacy concepts and rules. The figures presented for the year ended 31 December 2014 have been prepared under the Basel III rule framework. Comparatives for the year ended 31 December 2013 have been prepared under the Basel II rule framework. This is not an accounting disclosure and as such, is not required to be prepared in accordance with UK Generally Accepted Accounting Principles ( UK GAAP ). Therefore the information is not directly comparable with the annual financial statements and the disclosure is not required to be audited by external auditors. BAMLI has two subsidiaries which are Special Purpose Vehicles ( SPVs ) that are not required to hold regulatory capital on a standalone basis. For the purpose of this document, disclosures are based on the consolidated group consisting of Bank of America Merrill Lynch International Limited, Alie Street Investments 6 Limited and Alie Street Investments 16 Limited, as separate disclosure of BAMLI the company is not regarded as materially different. This document has been prepared to comply with Pillar 3 disclosure rules, for the purpose of explaining the basis on which BAMLI has prepared and disclosed certain information about the management of risks and application of regulatory capital adequacy rules and concepts. It therefore does not constitute any form of financial statement on BAMLI or its subsidiaries, or of the wider enterprise, nor does it constitute any form of contemporary or forward looking record or opinion on the BAC group. Although Pillar 3 disclosures are intended to provide transparent information on a common basis, the information contained in this document may not be directly comparable with the information provided by other banks. BAMLI s Pillar 3 disclosures are published on BAC s corporate website: 2 Section 1 : Introduction

8 1.3 Operation, Structure and Organisation The BAMLI group is the primary banking entity in EMEA, offering a range of corporate finance and banking services. For the purpose of this document, disclosures are on a consolidated basis unless stated otherwise. For a full BAC organisation chart, please refer to the investor relations website at Figure 2. High Level Organisation Chart represents indirect relationship Section 1 : Introduction 3

9 2. Capital Resources and Minimum Capital Requirement

10 2.1 Capital Resources Summary of 2014 Capital Resources Capital resources represent the amount of regulatory capital available to an entity in order to cover all risks. Defined under CRD IV, capital resources are designated into two tiers, Tier 1 and Tier 2 capital. Tier 1 capital consists of Common Equity Tier 1 ( CET1 ) and Additional Tier 1 ( AT1 ). CET1 is the highest quality of capital and typically represents equity and audited reserves; AT1 usually represents contingent convertible bonds; Tier 2 capital typically consists of subordinated debt and hybrid debt capital instruments. As per Table 1, BAMLI s capital resources of $6.7 billion consisted entirely of Tier 1 capital Key Movements in 2014 BAMLI s Capital Resources increased by $0.2 billion during The increase was primarily due to the recognition of 2014 retained earnings, which were partially offset by a deduction for prudential valuation implemented under CRD IV. Table 1. Capital Resources Section 2 : Capital Resources and Minimum Capital Requirement (Dollars in Millions) Ordinary Share Capital Share Premium Capital Contribution 4,600 4,600 Profit and Loss Account and Other Reserves (1) (2) Tier 1 Capital 6,666 6,488 Tier 2 Capital - 11 Total Capital Resources (net of deductions) 6,666 6,499 (1) Profit and loss account is shown here on a regulatory basis. See table 16 for a reconciliation to accounting balance sheet. (2) Profit and loss account reflects the inclusion of 2014 audited retained earnings Transferability of Capital within the Group Capital Resources are satisfied by sourcing capital either directly from BAC or from other affiliates. There are no material, current or foreseen, practical or legal impediments to the prompt transfer of capital resources or repayment of liabilities. There are no subsidiaries excluded from the consolidation. 4

11 2.2 Minimum Capital Requirement Summary of 2014 Minimum Capital Requirement The Minimum Capital Requirement is the amount of capital that Capital Requirements Regulation ( CRR ) require BAMLI to hold at all times. BAMLI s total Capital Resources must be greater than its Minimum Capital Requirement, allowing for a capital excess to cover any additional obligations, for example, Pillar 2. The Minimum Capital Requirement for BAMLI comprised primarily of Counterparty and Credit Risk ( CCR ) and a small portion of Market Risk ( PRR ). BAMLI has a Minimum Capital Requirement of $2.0 billion including PRR of $0.1 billion and CCR of $1.9 billion. Figure 3. Summary of Minimum Capital Requirement Key Movements in 2014 BAMLI s Minimum Capital Requirement increased year-on-year from $0.9 billion to $2.0 billion. As a result of increased lending activity, in line with the Enterprise strategy which affirms BAMLI as the primary EMEA banking entity, BAMLI s CCR requirement increased from $0.8 billion in 2013 to $1.9 billion in The implementation of CRD IV from 1 st January 2014 had an immaterial impact on BAMLI s Minimum Capital Requirement. 5 Section 2 : Capital Resources and Minimum Capital Requirement

12 Table 2. Minimum Capital Requirement (Dollars in Millions) Interest Rate PRR (1) Foreign Exchange PRR 26 2 Total Market Risk (PRR) Counterparty Risk 3 2 Credit Risk 1, Counterparty and Credit Risk (CCR) 1, Credit Valuation Adjustment (CVA) 1 - Operational Risk Total Minimum Capital Requirement 1, (1) Interest Rate PRR includes $39m (2013: $52m) of capital requirements in respect of securitisation exposures Minimum Capital Requirement Approach BAMLI has adopted the standardised approach for calculating PRR, CCR and CVA requirements and the basic indicator approach for Operational Risk Capital Requirements. In order to adhere to the standardised rules set out by the PRA, BAMLI uses external ratings based on a combination of ratings provided by Moody s Investors Service, Inc ( Moody s ), S&P and Fitch. Section 2 : Capital Resources and Minimum Capital Requirement 6

13 2.3 Capital Resources vs. Minimum Capital Requirement and Tier 1 Capital Ratio Capital Resources vs. Minimum Capital Requirement BAMLI s Capital Resources in excess of its Minimum Capital Requirement have decreased from $5.6 billion in 2013 to $4.7 billion in This decrease in surplus Capital Resources is mainly driven by an increase in Minimum Capital Requirement, primarily due to the increase in lending activity. BAMLI continuously maintains a surplus over its Minimum Capital Requirement Tier 1 ratio An entity s Tier 1 ratio is the ratio of Tier 1 capital to Risk Weighted Assets ( RWAs ). As a result of the increase in lending activity, BAMLI s RWA increased in 2014 in line with its Minimum Capital Requirement. As a result of this change, BAMLI s Tier 1 ratio has decreased from 57.2% to 26.9% in BAMLI s Tier 1 ratio is in excess of the current ratio requirement of 5.5% and in excess of Basel III fully phased in Tier 1 ratio of 6%, which is applicable from 1 st January Table 3. Capital Surplus over Minimum Capital Requirement and Tier 1 Ratio (Dollars in Millions) Total Capital Resources 6,666 6,499 Total Minimum Capital Requirements 1, Surplus over Requirements 4,683 5,592 Tier 1 Capital Resources 6,666 6,488 Risk Weighted Assets 24,784 11,338 Tier 1 Capital Ratio 26.9% 57.2% 7 Section 2 : Capital Resources and Minimum Capital Requirement

14 2.4 Leverage Ratio Summary The leverage ratio is a measure of Tier 1 capital as a percentage of exposure as defined under CRR rules. The requirement for the calculation and reporting of leverage ratios was introduced as part of CRD IV. Full implementation does not become effective under Basel III until 2018, with the preceding submissions used to refine the requirement. As a result of this, CRD IV legislation allows for the calculation of a transitional leverage ratio, permitting various deductions to capital in the years leading to However, the PRA, as local regulator, require transitional Tier 1 capital to be calculated on a fully phased in basis. Therefore, the transitional and fully phased-in leverage ratios are computed in the same manner. The leverage ratio minimum requirement during this transitional phase is 3%. BAMLI s ratio is in excess of this at 24.1%. Table 4. Transitional versus Fully Phased-In Leverage Ratio Minimum 2014 (Dollars in Millions) Requirement Transitional Leverage Ratio 24.1% 3.0% Fully Phased-In Leverage Ratio 24.1% 3.0% Section 2 : Capital Resources and Minimum Capital Requirement Key Movements in 2014 BAMLI s Leverage Ratio has decreased during the year due to growth in lending activity but at 24.1% it is far in excess of the minimum requirement of 3%. 8

15 3. Liquidity Position and Encumbered and Unencumbered Assets

16 3.1 Liquidity Position 3.1.1Regulatory Requirements BAMLI is subject to BIPRU 12 requirements set out by the PRA and must demonstrate self-sufficiency for liquidity purposes; this is consistent with the internal risk appetite. BAMLI is subject to Individual Liquidity Guidance ( ILG ), which specifies the level of BIPRU 12-qualifying liquid assets that BAMLI must maintain to cover a PRA-developed stress test plus a series of additional requirements specific to BAMLI Liquidity Position As of 31 December 2014, BAMLI s excess liquidity was $3.2 billion. BAMLI was in excess of both regulatory and internal liquidity requirements Funding Profile BAMLI primarily funds its balance sheet through capital and intercompany term funding. These funding sources are used to support BAMLI s lending, trading and capital markets activity and maintain sufficient excess liquidity. 9 Section 3 : Liquidity Position and Encumbered and Unencumbered Assets

17 3.2 Encumbered and Unencumbered Assets An asset shall be treated as encumbered if it has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn. This asset encumbrance disclosure is prepared in accordance with European Banking Authority ( EBA ) guidelines and is based on financial statement information prepared in accordance with UK GAAP. In BAMLI, encumbered assets primarily comprise of secured obligations under derivative contracts. Corporate Treasury monitors the funding requirement / surplus and modeled liquidity impact relating to BAMLI s activities on an ongoing basis. BAMLI has seen balance sheet growth in 2014; however the types of encumbered assets have remained broadly constant. BAMLI primarily adopts standard collateral agreements and collateralises at appropriate levels based on industry standard contractual agreements (for example Credit Support Annexes CSAs ). BAMLI did not receive any collateral available for encumbrance as defined in the EBA guidelines. Table 5. Analysis of Assets (1) Section 3 : Liquidity Position and Encumbered and Unencumbered Assets (Dollars in Millions) Carrying Amount of Encumbered Assets Assets of the Reporting Institution ,101 Equity Instruments Debt Securities - - 2,578 2,578 Other Assets (2) - 3,414 (1) Greyed out cell format stems from EBA asset encumbrance template, indicating not applicable disclosures. (2) Other Assets has been reported per EBA guidelines. Remaining assets primarily relate to cash pledged on derivative contracts and loans & advances. Table 6. Encumbered Assets / Collateral Received and Associated Liabilities (Dollars in Millions) Carrying Amount of Selected Financial Liabilities Fair Value of Encumbered Assets Matching Liabilities, Contingent Liabilities or Securities Lent 10 Carrying Amount of Unencumbered Assets Fair Value of Unencumbered Assets Assets, Collateral Received and Own Debt Securities Issued other than Covered Bonds and ABSs Encumbered

18 4. Risk Management, Objectives and Policy

19 Bank of America Merrill Lynch International Limited Pillar 3 Disclosures BAC Risk Framework BAMLI is integrated into and adheres to the global BAC group management structure including risk management and oversight, as adapted to reflect local business, legal and regulatory requirements (the Risk Framework ). BAC adopted a revised Risk Framework in January 2014 with additional enhancements to the original framework published in The following section lays out the risk management approach and key risk types. 4.2 Risk Management Approach A comprehensive approach to risk management is taken, integrating it with strategic, capital and financial operating plans. Risk management and capital utilisation are integral parts of the strategic planning process and are considered throughout the process to align the businesses strategies with overall risk appetite and capital considerations. This integration and alignment enhances BAC s financial risk management by focusing on risk-adjusted returns within a given set of financial considerations and risk limits. Risk is managed systemically, with a focus on the whole entity and by business, Governance and Control Functions ( GCF ), geography, legal entity and /or branch (where appropriate), product, service and transactions. This holistic approach promotes the risk versus reward analysis needed to make informed strategic and business decisions. The Risk Framework details the commitment to maintaining strong, consistent risk management practices across businesses, geographies and employees. The five components of the risk management approach are: Risk culture Risk appetite Risk governance Risk reporting Risk management processes Focusing on these five components allows effective management of risks across the seven key risk types faced by BAMLI s businesses, namely: strategic, credit, market, liquidity, operational, compliance and reputational risks. There is clear ownership and accountability for managing risk across three lines of defence: 1) front line units; 2) independent risk management; and 3) corporate audit. 4.3 Risk Culture Consistent adoption of the Risk Framework is essential for a strong, sustainable culture of risk management. A sustainable risk culture throughout the organisation is critical and is a clear expectation of the BAC Executive Management Team, Board and regulators. A strong risk culture provides benefits for the overall performance of BAMLI and its businesses. Individual accountability is the cornerstone of the Code of Conduct and is at the heart of the risk culture. Each employee is charged with identifying, escalating and debating risk. These are the essential behaviours that sustain the risk culture. BAMLI follows a multi-faceted approach to continuously improve its risk culture and drive behaviour and adoption throughout BAMLI. This is undertaken by: 1. Having clear accountabilities for risk management at each level; from the Board, to management, business leaders and employees, enabling a holistic view of risk 2. Expecting all managers to incorporate risk considerations explicitly in their management practices, and encourage challenging views and effective balancing of risk and reward in business decisions 3. Embedding risk management into human resources processes, policies and systems such as job descriptions; hiring, staffing and promotion practices; performance management; compensation; and learning and leadership development 4. Ongoing formal and informal training and communications sustain the shared understanding of risk management, strengthen the risk culture and build risk skills throughout BAMLI 11 Section 4 : Risk Management, Objectives and Policy

20 4.4 Risk Appetite The risk appetite statement collectively defines the aggregate level and types of risk BAMLI is willing to accept in order to achieve its business objectives. It includes qualitative statements as well as quantitative measures. The risk appetite statement is reviewed and approved by the BAMLI Board at least annually. 4.5 Risk Governance BAC s Executive Management Team, with oversight by the BAC Board, defines and executes a governance structure that establishes and pursues BAC s objectives while monitoring performance and balancing risk-reward BAMLI Risk Governance Structure The BAMLI Board ensures suitable risk management and controls through the BAMLI Board Risk Committee ( BRC ) of the BAMLI Board of Directors ( the Board ), the BAMLI Risk Management Committee ( RMC ) and the EMEA Regional Risk and Control Committee ( RRCC ). Figure 4. Risk Governance Structure BAMLI Board of Directors Board Committee BAMLI Board Risk Committee Management Committee BAMLI Risk Management Committee EMEA Regional Risk and Control Committee Section 4 : Risk Management, Objectives and Policy The BAMLI BRC is responsible for the oversight of senior management s responsibilities regarding the identification of, management of, and planning for Market Risk, Credit Risk, Liquidity Risk, Operational Risk and Reputational Risk. The BAMLI BRC met three times in 2014 with the first meeting in May The BAMLI RMC reports to the BAMLI BRC and is responsible for providing management oversight and approval of (or reviewing and recommending to the BAMLI BRC, the BAMLI Board or other committees, as appropriate) Market Risk, Credit Risk, Operational Risk, balance sheet, capital, liquidity management and stress testing activities. The EMEA RRCC has oversight of all enterprise operations within the EMEA region including BAMLI, and reports to BAMLI Board. The purpose and objective of the EMEA RRCC is to provide management oversight of Operational Risk, Compliance Risk, Reputational Risk, Conduct Risk and the control environment of the EMEA region. The Board of Directors of BAMLI is responsible for identifying and approving Board candidates to fill Board vacancies as and when they arise. The Board of Directors of BAMLI considers candidates from a wide range of backgrounds and considers candidates on merit and against objective criteria and with due regard for the benefits of diversity on the Board, including gender representation, taking care that appointees have sufficient time available to devote to the position. All appointments to the Board are made in compliance with Bank of America s Background Check Policy and Anti Bribery and Anti Corruption enterprise standards. 12

21 Board member experience is detailed within individual director biographies (appendix 1). The independent risk management functions within the EMEA region led by the EMEA Chief Risk Officer ( EMEA CRO ) have operational responsibility for risk management of BAMLI and ensuring appropriate reporting and escalation to the Board BAMLI Risk Statement The BAMLI group is the primary banking entity in EMEA, offering a range of corporate finance and banking services. Clients include large multinational groups, financial institutions, governments and government entities and private equity firms. As at 31 December 2014, BAMLI s total assets prepared in accordance with UK GAAP totaled $21.4bn, and comprised mainly of third party loans and advances of $14.1bn, and trading assets of $3.6bn. Profit for the year ended 31 December 2014 was $188m mainly driven by Interest Income and Fee and Commission Income. As at 31 December 2014 BAMLI had $6.7 bn of regulatory Capital Resources, all consisting of Tier 1 capital, and a Tier 1 capital ratio of 26.9%. Consistent with BAMLI s business strategy, 90.8% of BAMLI s Credit Risk business is concentrated to EMEA. BAMLI s largest industry concentration is to Industrial and Commercial companies which represents 58.6% of exposure. Other industries with significant concentrations include Institutions 14.6% and Energy and Commodities 8.7%. The residual maturity of 56.1% of its Counterparty and Credit Risk exposure is between 1 and 5 years and 40.7% is below one year. Although generally assessed internally of being high quality, 58.9% of exposure in BAMLI is to counterparties not rated by external rating agencies. Market risk for BAMLI is generated by the activities in interest rate, foreign exchange and credit markets. BAMLI maintains excess liquidity (2014: $3.2bn) in order to meet day-to-day funding requirements, withstand a range of liquidity shocks, safeguard against potential stress events, and meet internal and regulatory requirements such as ILG and, from October 2015, the Liquidity Coverage Ratio issued by the PRA. BAMLI primarily funds the balance sheet through capital and intercompany term funding. BAMLI is integrated into and adheres to the global BAC group management structure including risk management and oversight, as adapted to reflect local business, legal and regulatory requirements. The BAC Risk Framework describes the five components (risk culture, risk appetite, risk governance, risk reporting and risk management processes) of its risk management approach and the seven key risk types (Credit, Market, Operational, Liquidity, Strategic, Compliance and Reputational Risk) faced by its businesses. This is discussed in more detail within this section. BAMLI s risk tolerance is expressed as its risk appetite statement. This risk appetite statement is driven by the business strategy and capital and is owned and approved at least annually by the BAMLI Board of Directors. BAMLI s RMC monitors performance against the risk appetite statement. The RMC reports to the BRC with a clear escalation process to the Board. BAMLI s risk appetite metrics cover Credit, Market, Liquidity and Operational Risk, with consideration given to both baseline and stressed conditions. BAMLI manages Credit Risk concentration through a number of metrics that are aligned to credit quality using internal risk rating, geography and industry. Market risk metrics relate to Management VaR and Stress Loss, Operational Risk metrics relate to losses incurred and the aggregate assessment described in the Risk and Control Self Assessment ( RCSA ). Liquidity Risk metrics relate to key liquidity coverage ratios. Additionally, compliance with the requirements of CRD IV minimum capital requirements, surplus over minimum capital requirements as well as other key figures and ratios are monitored regularly for BAMLI. The BAMLI Board, supported by the BRC, confirms that the risk management arrangements outlined are adequate to facilitate the management of risk in the context of BAMLI s profile and strategy as set out in the risk statement. 4.6 Risk Reporting Effective risk reporting is critical to provide a clear understanding of current and emerging risks, as well as how these risks align with overall risk appetite and ability to quickly and effectively act upon them. BAMLI achieve transparency in risk reporting by understanding the current risk profile; leveraging data, information and analytics; and by reporting actionable insights and recommendations to appropriate management levels. The principles of risk reporting are to: maintain a clear understanding of the regulatory and macroeconomic environment; use clear and uniform language to articulate risks within businesses (where applicable); strive to maintain an aggregate and comprehensive view of all material risks; and work toward complete, sophisticated and consistent risk quantification methods. 13 Section 4 : Risk Management, Objectives and Policy

22 4.7 Risk Management Processes The holistic and comprehensive Risk Framework integrates risk management activities in key strategic and financial planning processes, day to day business processes and model risk management processes across businesses and BAC as a whole. A simple but effective risk management process is employed, referred to as IMMR: Identify and measure, Mitigate and control, Monitor and test, Report and review. This process builds on the employees regular tasks and provides a solid knowledge base for mitigating risk. Section 4 : Risk Management, Objectives and Policy 14

23 4.8 Key Risk Types The risk management processes outlined above allow BAMLI to manage risks across the seven key risk types; Strategic, Credit, Market, Liquidity, Operational, Compliance and Reputational. Strategic Risk Definition Strategic Risk is the risk that results from incorrect assumptions about external and/or internal factors, inappropriate business plans (e.g. too aggressive, wrong focus), ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic and competitive environments, such as business cycles, competitor actions, changing customer preferences, product obsolescence and technology developments in the geographic locations in which the BAC operates. Strategic Risk Management Process Strategic Risk is managed through the assessment of effective delivery of strategy. Strategic Risk is monitored through a number of existing processes ranging from monitoring of financial and operating performance, through to the management of recovery and resolution plans and also with the regular assessment of earnings and risk profile throughout the year. Regional strategy execution and risk management are aligned to the overall BAC s strategic plans through a formal planning and approval process. Management routines play an important role in developing strategic recommendations for committees, regional and executive management. GCFs provide key input, oversight and challenge to business level strategic assessments. Topical presentations are made to address any developments or considerations as it relates to strategic planning. Strategic Risk is embedded in every business and, to some extent, is part of the other major risk types (Credit, Market, Liquidity, Operational, Compliance and Reputational). Strategic Risk Governance Process The strategic plan is reviewed and approved annually by the BAC Board alongside the capital plan, financial operating plan and risk appetite. Significant strategic actions, such as capital actions, material acquisitions or divestitures, and recovery and resolution plans are reviewed and approved by the BAC Board as required. Strategic planning at BAC level is representative of more detailed planning undertaken at the business unit, regional and BAMLI level. At the business unit, regional and BAMLI level strategic planning processes mirror each other and output is incorporated into the Enterprise planning process. Routines exist to discuss the Strategic Risk implications of new business and product entries and other strategic initiatives, and to provide approvals where appropriate. GCFs provide key input and oversight to front line unit and regional level strategic assessments. Strategic Risk Reporting Process Individual business units provide regular tracking updates to both global and regional management on their business performance. Updates take into account analyses of performance relative to the financial operating plan and risk appetite, the strength of capital and liquidity positions and stress tests, which address potential macroeconomic events, changing regulatory requirements and various market growth rate assumptions. 15 Section 4 : Risk Management, Objectives and Policy

24 Strategic Risk (cont d) Focused regional performance updates are provided to Executive Leadership and the BAC Board on a periodic basis. Entity performance updates are provided to the BAMLI Board. Credit Risk Definition BAC defines Credit Risk as the loss arising from the inability or failure of a borrower or counterparty to meet its obligations. The Company defines credit exposure to a borrower or counterparty as the loss potential arising from loans, leases, derivatives and other extensions of credit. Credit Risk Management Process Credit Risk to a borrower or counterparty is managed based on their risk profile, which includes assessing repayment sources, underlying collateral (if any), and the expected impacts of the current and forward-looking economic environment on the borrowers or counterparties. Underwriting, credit management and credit risk limits are proactively reassessed as a borrower s or counterparty s risk profile changes. Credit risk management includes the following processes: Credit origination Loss mitigation activities Portfolio management Managing along these processes creates a comprehensive account of Credit Risk activities across the lifecycle of a credit-intensive transaction. Because these processes are intertwined, an insight gained in managing one process informs actions across all processes (e.g. the credit concentration insights gained in portfolio management inform credit origination decisions). Section 4 : Risk Management, Objectives and Policy Credit Origination As BAC s main banking entity in EMEA, BAMLI s credit strategy and origination is very much focused on its commercial lending and treasury products activities which account for the majority of its credit exposure. These activities include drawn and un-drawn corporate and institutional lending facilities to clients for general corporate purposes, liquidity management, trade-finance, bridge financing, acquisition related activities, as well as asset-backed and secured lending. There is also a limited amount of derivative related credit exposure. When entering into transactions with a counterparty, the primary focus when granting credit facilities is done on the basis of capacity to repay rather than placing primary reliance on Credit Risk mitigants. Credit Risk is assessed through various techniques including risk modeling, stress testing, underwriting and asset analysis, while considering current views on economic, industry and counterparty outlooks to ensure portfolio asset quality remains within approved credit risk metrics and limits. For lending-based credit exposures, credit risk is measured as the amount of binding, advised or guidance limits to a counterparty. The main exposure measure for a traded product is potential exposure, which is the maximum amount of exposure the entity has on a derivative contract at a future date given a particular confidence level. Loss Mitigation Activities Credit Risk is managed by reviewing and establishing limits for credit exposure, disciplined underwriting including the establishment of covenants or monitoring triggers, maintaining collateral and continually assessing the creditworthiness of counterparties. 16

25 Credit Risk (cont d) Credit Risk limits define the maximum credit exposure that the Enterprise is willing to assume to a debtor over a specified time period. The process for assigning a counterparty s Credit Risk exposure limit is guided by: BAC credit policy, standards and procedures and the creditworthiness of the counterparty or borrower as expressed by the credit rating assigned to it through use of scorecards and experiential judgment of Credit Risk officers. Certain lending transactions may be supported by credit enhancing arrangements such as property liens or claims on operating assets (e.g. commercial mortgages, residential mortgages, auto loans, leases, consumer loans and other receivables). In these cases, credit assessment relies primarily on the amount, asset type, quality, and liquidity of the supporting collateral, as the performance of the collateral and/or associated cash flows are the expected source of repayment. Under Enterprise policy, BAMLI accepts collateral that it is permitted by documentation such as repurchase agreements or CSA to an International Swap Dealers Association Master Agreement ( ISDA ). For derivatives, required collateral levels may vary depending on the credit quality of the party posting collateral. Generally, collateral is accepted in the form of cash and high grade government securities. Based on provisions contained in legal netting agreements, BAMLI nets collateral against the applicable derivative fair value. Daily valuations are carried out on market trading activities such as collateralized OTC derivatives and structured finance trades in support of margining requirements. Collateral management terms in legal agreements follow guidance per the non-standard collateral policy and practices. All requests for non-standard collateral are approved through a committee process. Collateral Management report and escalate all fails to receive and deliver collateral to the appropriate persons. The taking of third party guarantees represents a further form of Credit Risk mitigation. Guarantees are reviewed by the Enterprise s legal department and must conform to certain standards in order to be recognised as a credit mitigant for Credit Risk management purposes. The main types of provider of guarantees are banks, other financial institutions and corporates, the latter typically in support of subsidiaries of their company group. Portfolio Management Once credit has been extended to a counterparty, Credit Risk is monitored at the individual and portfolio levels. At the borrower and counterparty level, Credit Risk Management reviews the risks inherent in ongoing financial performance. Names requiring particular focus are included in the relevant portfolio watch list. Regular portfolio reviews are conducted to monitor counterparty creditworthiness, and evaluate potential transaction risks with a view toward early problem identification and protection against unacceptable credit-related losses. The portfolio also undergoes periodic testing and examinations by Credit Review, which is part of Corporate Audit, enabling the detection of deteriorating credit trends, develop mitigation strategies and measure the effectiveness of actions taken. Where appropriate, the business may make use of portfolio hedging instruments such as credit default swaps, or private risk insurance. Credit Risk Management Governance Process BAMLI Credit Risk is integrated into the BAC and BAMLI governance structure as described earlier in the document. The Credit Risk governance structure enables a system of risk escalation, which includes the hierarchy and process to be followed for approvals, limit excesses, policy variances and internally identified issues and emerging risks. 17 Section 4 : Risk Management, Objectives and Policy

26 Credit Risk (cont d) Credit Risk Management Reporting Process Transparency of Credit Risk is critical to effective risk management. To ensure that appropriate Credit Risk transparency exists across the businesses and there is appropriate escalation to the BAC and BAMLI Boards and senior management, comprehensive and actionable Credit Risk internal reports are produced, which contain the required granularity of content for each level of seniority. Reporting includes monitoring of credit exposure against BAMLI board approved risk appetite limits, as well as more detailed credit information covering total outstanding volumes, key counterparty exposures, credit quality trends and concentration analyses. Market Risk Definition Market Risk is the risk that the value of assets and liabilities or revenues will be adversely affected by changes in market conditions. Trading positions within BAMLI are subject to various changes in market based risk factors. The majority of this risk is generated by trading activities in interest rate, foreign exchange and credit markets. In addition, the value of assets and liabilities could change due to market liquidity, correlations across markets and expectations of market volatility. BAMLI seeks to manage these risk exposures by using a variety of techniques that encompass a broad range of financial instruments. Market Risk Management Process Market Risk is identified, analysed, monitored, and controlled by an independent function that is overseen by EMEA Market Risk Management. Section 4 : Risk Management, Objectives and Policy The Global Markets division of BAC seeks to run its business on a globally consistent basis. This means that the market risks assumed by Global Markets are identified, measured and controlled on a consistent basis irrespective of the location in which they are taken and booked. The BAC risk appetite, the line of business ( LOB ) risk appetite statements and LOB trading and hedging strategies provide a comprehensive framework for the management of risk, ensuring that the risk profile for each business is aligned with the overall enterprise risk appetite. The approach to Market Risk management is defined by the BAC Risk Framework and related Global Markets Risk policies, which apply globally to Market Risk management functions in respect of Global Markets activity. To evaluate risk in the trading activities, BAMLI focuses on the actual and potential volatility of revenues generated by individual positions as well as portfolios of positions. Various techniques and quantitative measures are utilised to enable the most complete understanding of these risks. These measures include sensitivities of positions to various market risk factors, such as the potential impact on revenue from a one basis point change in interest rates, and statistical measures utilising both actual and hypothetical market moves, such as VaR and Stress testing. VaR VaR is a common statistic used to measure Market Risk as it allows the aggregation of Market Risk factors, by including the effects of portfolio diversification. VaR represents the expected loss for a given portfolio, probability and time horizon and produces a value such that there is a set probability that the MTM loss on the portfolio over the given time horizon does not exceed this value. 18

27 Market Risk (cont d) BAMLI uses the historical simulation approach based on a three year window of historical data. BAMLI s primary VaR statistic is equivalent to a 99% confidence level with a one-day holding period. Stress Testing Stress tests are performed to supplement the risk information derived from position, sensitivity and VaR measurement. Stress testing for the trading portfolio is integrated with enterprise-wide stress testing and incorporated into the limits framework. A set of scenarios, categorised as either historical or hypothetical, are computed for the overall trading portfolio in BAMLI. These include stress event scenarios ( SES ) performed at the risk factor level and enterprise wide stress tests including a range of historical events. Point-of-weakness stress tests are performed on both regular and ad hoc basis to examine potential portfolio vulnerabilities. Market Risk Governance Process BAMLI Market Risk is integrated into the BAC and BAMLI governance structure as described earlier in the document. Market Risk management in BAMLI is a decentralized process with centralized oversight. To be effective, all personnel involved in risk related activities are an active part of the risk management process. A Regional Risk Manager is appointed for EMEA and also assumes responsibility for the market risk management function in BAMLI (the BAMLI Market Risk Executive). BAMLI employs individual risk factor limits, aggregate risk exposure limits (VaR limits) and stress test limits. Limits provide thresholds that may not be exceeded without appropriate approval. Approval processes are in place to address temporary limit increases or transfers of limit capacity in accordance with delegated authorities. Market Risk management governs the new product approval process and ensures that senior management is informed of new product developments. Market Risk management continually reviews, evaluates and enhances the VaR model so that it reflects the material risks in the trading portfolio. Changes to the VaR model are reviewed and approved prior to implementation and any material changes are reported to management through the appropriate governance process. Market Risk Reporting Process Transparency of market risks is critical to effective risk management. BAMLI produce regular reports on exposure, including VaR, stress, and risk factor sensitivities. To ensure that appropriate market risk transparency exists across the businesses and up through senior management and the Board, comprehensive and actionable market risk reports are produced, which contain the required granularity of content for each level of management seniority. 19 Section 4 : Risk Management, Objectives and Policy

28 Liquidity Risk Definition Liquidity Risk is the potential inability to meet contractual and contingent financial obligations, both on or off-balance sheet, as they come due. Liquidity Risk Management Process The fundamental objective of Liquidity Risk management within BAMLI is to ensure that the entity can meet its financial obligations across market cycles, through periods of financial stress and market shocks and stay within a defined Liquidity Risk appetite. The approach to managing BAMLI s Liquidity Risk has been established by the BAMLI Board, aligned to BAC processes, but tailored to meet BAMLI s business mix, strategy, activity profile, risk appetite, and regulatory requirements. Key components include: The BAMLI Liquidity Risk policy, which formally articulates the principles for managing liquidity risk within BAMLI, including requirements for internal stress testing, limits and guidelines, reporting and monitoring, roles and accountabilities, and regulatory requirements The Liquidity Risk appetite, established by the BAMLI Board, requiring BAMLI to maintain sufficient excess liquidity resources to meet net modelled outflows under an internally-developed severe stress scenario and to comply with regulatory requirements The BAMLI contingency funding plan, which details senior management s strategy to address potential liquidity shortfalls during periods of stress BAMLI is subject to BIPRU 12 requirements set out by the PRA and must demonstrate self-sufficiency for liquidity purposes; this is consistent with BAMLI s internal risk appetite. Section 4 : Risk Management, Objectives and Policy Since January 2014, BAMLI has also been subject to the Basel III liquidity requirements legislated by the European Commission s Capital Requirements Regulation ( CRR ) and Capital Requirements Directive. In 2015, BAMLI will be required to meet a minimum Liquidity Coverage Ratio ( LCR ). As of 31 December 2014, BAMLI was in excess of both internal and regulatory liquidity requirements. Liquidity Risk Governance Process BAMLI Liquidity Risk is integrated into the BAC and BAMLI governance structure described earlier in the document. Corporate Treasury is responsible for the day-to-day monitoring and management of liquidity risk and BAMLI s excess liquidity resources, including the processes for measurement, reporting, analysis, and control of Liquidity Risk across the entity. The Liquidity Risk governance structure enables a system of risk escalation, which includes the hierarchy and process to be followed for approvals, limit excesses, policy variances, and internally identified issues and emerging risks. Liquidity Risk Reporting Process A disciplined approach to managing Liquidity Risk provides management with the timely and critical information essential for making sound decisions across market cycles. Dedicated personnel monitoring liquidity, providing regular reporting and active management of BAMLI s liquidity position and metrics enables the identification of emerging trends and potential early warning indicators of liquidity stress for BAMLI. Liquidity Risk reporting is tailored to BAMLI s business mix, strategies, legal entity structure and market environment. Reports are shared with various risk governance committees, the Board and the regulators, as appropriate. 20

29 Operational Risk Definition Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational Risks are associated with the following seven operational loss event categories: internal fraud; external fraud; employment practices; clients, products and business practices; damage to physical assets; business disruption and systems failures; and execution, delivery and process management. Operational Risk Management Process Operational Risk is managed through independent functions consisting of: Corporate Operational Risk; Global Banking and Markets Operational Risk, with specific legal entity focus; Independent Business Risk; and, businesses and the GCFs. Each has distinct roles and responsibilities, and together they form the foundation for the business environment internal control factors used to manage Operational Risk. Operational Risk management is approached from the perspectives of the Enterprise, the Businesses, and the legal entity. Corporate Operational Risk develops and guides the strategies, policies, practices, control and monitoring tools for assessing and managing operational risk across the organisation. The businesses are responsible for all the risks within the Businesses, including operational risks, with oversight and challenge from the Global Banking and Global Markets Operational Risk team, and the Technology, Operations and Control Functions Operational Risk team. Compliance Risk The BAMLI RCSA captures the operational exposures faced by BAMLI, which entails: ongoing identification, measurement, mitigation, monitoring, reporting and escalation of applicable current and emerging operational risk and causes, and associated controls and metrics. In addition to the RCSA process, BAMLI conducts other operational risk management processes including: internal and external operational loss data collection; and, the execution of scenario analysis. Scenario analyses are targeted to identify plausible, low-frequency, high-severity operational loss events. Risk reduction and mitigation activities are developed and enacted when potential operational risk losses are assessed or control gaps identified. Operational Risk Governance Process BAMLI Operational Risk is integrated into the BAC and BAMLI governance structure described earlier in the document. The BAMLI Operational Risk management framework incorporates and documents the overarching processes for identifying, measuring, mitigating, controlling, monitoring, testing, reviewing and reporting Operational Risk information to senior management governance bodies. Operational Risk Reporting Process Transparency of Operational Risk is critical to effective risk management. To achieve transparency, BAMLI reports regularly on the operational risk exposures, including operational loss events and RCSA results. A consolidated report on operational risk is reviewed, discussed and debated with both the management and Board level committees. Definition Compliance Risk is the risk of legal or regulatory sanctions arising from the failure of the Enterprise and its subsidiaries (which includes BAMLI) to comply with requirements of banking and financial services laws, rules and regulations. 21 Section 4 : Risk Management, Objectives and Policy

30 Compliance Risk (cont d) Compliance Risk Management Process The businesses are the primary risk takers and are responsible for managing risks in their day-to-day activities. Businesses receive support in risk analysis from the GCFs, including Global Risk Management, Global Compliance, Legal and Enterprise Control Functions. Each GCF assumes different but complementary responsibilities, executed separately from the actions owned by the businesses, to independently assess and mitigate risks across the Company for the risk type or function to which they are aligned. Compliance Risk Governance Process Global Compliance is a separate function with governance routines and executive reporting distinct from those of the businesses or other GCFs. While GCFs are collectively responsible for overseeing the Company s overall compliance with applicable laws, rules and regulations, Global Compliance assumes responsibility for Compliance Risk. Global Compliance is responsible for identifying and mitigating compliance risks, escalating Compliance Risks and issues, and providing ongoing, objective oversight of compliance risk for the Company. Section 4 : Risk Management, Objectives and Policy Reputational Risk Compliance Risk Reporting Process Global Compliance is led by the Global Compliance Executive who reports to the Global Chief Risk Officer. The Global Compliance Executive maintains the authority for oversight of Compliance Risk and compliance-related matters as outlined in the Global Compliance framework, which is an addendum to the Risk Framework. The Global Compliance framework outlines elements and related high-level requirements of the integrated Global Compliance program, and also defines roles and responsibilities related to the implementation, execution and oversight of the Global Compliance program by Global Compliance. The regional Compliance Executive is approved by the PRA to occupy the controlled function responsible for compliance oversight for BAMLI. Compliance Risk issues are reported to the BAMLI Board, the EMEA Executive Committee and the EMEA RRCC. Definition Reputational Risk is the potential that negative perceptions of BAC s conduct or business practices will adversely affect its profitability or operations through an inability to establish new or maintain existing customer / client relationships. Reputational Risk can stem from many of BAC s activities, including those related to the management of the strategic, operational or other risks, as well as the overall financial position. As a result, BAC evaluates the potential impact to the reputation within all of the risk categories and throughout the risk management process. Reputational Risk Management Process At the Enterprise level, Reputational Risk is reviewed by the Enterprise Risk Committee and the Management Risk Committee, which provide primary oversight of Reputational Risk. Additionally, the Global Risk Management Leadership team and the BAC Board review the top reputational risks as part of the Summary Risk Report process. For the EMEA region there is a specialist committee, the EMEA Reputational Risk Committee ( RRC ), whose charter includes consideration of reputational risk issues and to provide guidance and approvals for activities that present Reputational Risks which are not addressed by other current control framework. 22

31 Reputational Risk The EMEA RRC is a sub-committee of the EMEA Regional Executive Committee and applicable to all key legal operating entities in the region. The EMEA RRC reports into the EMEA Regional Risk and Controls Committee on a monthly basis and provides an update on any Reputational Risk items that have been raised for discussion relating to BAMLI. Ultimately, to ensure that reputational risk is mitigated through regular business activity, awareness of reputational risk is integrated into the overall governance process, as well as incorporated into the roles and responsibilities for employees. Given the nature of Reputational Risk BAC do not set quantitative limits for the level of acceptable risk. Through proactive risk management, BAC seeks to minimise both the frequency and impact of reputational events. Reputational Risk Governance Process BAC has an appropriate organisational and governance structure in place to ensure strong oversight at both the Enterprise and business levels. The EMEA RRC membership consists of executive representation from Markets, GCIB and control functions (General Counsel, Compliance and Risk). The committee is chaired by either the Regional President or COO. The EMEA RRC charter requires that at least one representative from Markets, one representative from Banking and at least two control functions (one of which must be Risk) are in attendance for meetings to proceed. Public disclosures of information, transactions, products, services, business initiatives, business practices, regulatory relationship challenges, customer segments and clients that present elevated levels of reputational risk are escalated to EMEA RRC for review and approval. These include: Business activities that present significant legal, regulatory or headline risk Violations of, or deviations from, BAC policy Concerns about client identity, money laundering, potential criminal activity or potential violations of economic sanctions requirements, such as financing of a direct or indirect terrorist or sanctioned country, company or person Business activities that have a particular accounting, finance or tax treatment as a material objective Business activities, which, due to their nature or due to the current / historic reputation of any of the parties involved, might reflect adversely on the reputation of the firm or suggest the need for close scrutiny Items requiring increased attention may be escalated from the EMEA RRC to the EMEA Regional Executive Committee and/or the Global Banking and Markets Reputational Risk Committee as appropriate. Ultimately, to ensure that Reputational Risk is mitigated through regular business activity, awareness of Reputational Risk is integrated into the overall governance process, as well as incorporated into the roles and responsibilities for employees. 23 Section 4 : Risk Management, Objectives and Policy

32 Reputational Risk (cont d) Reputational Risk Reporting Process The reporting of Reputational Risk issues is captured as part of the management routines for the EMEA RRC. Issues that are identified and presented for discussion as part of the meeting logistics are included in reporting. Tracking of items presented to EMEA RRC is maintained through reporting which provides detail such as description of the Reputational Risk issue, reason for escalation to the EMEA RRC, geographical jurisdiction of the issue, reason for escalation, decision reached by EMEA RRC and which legal entity the issue relates to. Summary reporting of the EMEA RRC issues is provided to the EMEA regional executive committee on a monthly basis as part of the control function support papers. 4.9 Other Risk Considerations Wrong-Way Risk Wrong-way risk is a concentration risk which exists when there is adverse correlation between the counterparty s probability of default and the market value of the underlying transaction and /or the collateral. Examples of wrong-way risk include, but are not limited to situations that involve a counterparty that is a resident and/or incorporated in an emerging market entering into a transaction to sell non-domestic currency in exchange for its local currency; a trade involving the purchase of an equity put option from a counterparty whose shares are the subject of the option; or the purchase of credit protection from a counterparty who is closely associated with the credit default swap reference entity. BAMLI uses a range of policies and reporting to detect and monitor wrong-way risk from trade inception until maturity of the transaction. Forums have been established to review potential situations of wrong-way risk and, depending on the type of wrong way risk the risk management ranges from ex-ante approval prior to trade inception to ex-post portfolio limit management. BAMLI has also developed a stress testing framework that is utilized for scenario analysis to proactively manage wrong-way risk in the portfolio. In keeping with BAC s risk management framework, several processes exist to control and monitor wrong-way risk including reviews at the Global Markets Risk Committee and Country Credit Risk Committee. Exposures to Interest Rate Risk in the Non-Trading Book No detailed disclosures are made in respect of exposures to interest rate risk in the non-trading book as the information provided by such disclosure is not regarded as material. Section 4 : Risk Management, Objectives and Policy Impaired Assets As at December 2014, BAMLI s impairment for credit losses was $105m (see sections 5.1 and for more detail). Equities Exposures No detailed disclosures are made in respect of equity exposures as the information provided by such disclosures is not regarded as material. Securitisation Securitisation risk is defined as the risks arising from securitisation transactions in relation to which the institutions are originator, sponsor or investor, including reputational risks, such as arise in relation to complex structures or products. BAMLI undertakes immaterial trading activity as an investor in securitisations and the risk management of any securitisations is in line with Global Market Risk and Reputational Risk management policies. Credit Risk Mitigation With the exception of a netting agreement that exists between BAMLI and BANA, BAMLI did not actively use Credit Risk mitigation to reduce Capital Requirements in the non trading book in

33 Impact of a Credit Rating Downgrade on Collateral Posted The full impact of a BAC credit rating downgrade on BAMLI depends on numerous factors, including (1) the type and severity of any downgrade; and (2) the reaction of counterparties, customers, and investors who face BAMLI. Based on the terms of various OTC derivatives contracts and other trading agreements, a BAC credit rating downgrade may require the posting of additional collateral to counterparties or counterparties choosing to unwind or terminate specific transactions. The materiality of such events will depend on whether the downgrade affects long-term or short-term credit ratings, as well as whether credit ratings drop by one or more levels. Based on BAMLI s current activity, none of these events would be expected to have a significant impact on the BAMLI liquidity profile. For more information on the impact of a credit downgrade on collateral posted for the Enterprise see pg. 69 of the BAC 10K filing for Internal Capital Adequacy Assessment Process ( ICAAP ) BAMLI prepares an ICAAP document which includes the following key elements: Description of Senior Management oversight process including risk management monitoring of risk profile A three year capital plan Analysis of the impact of stress testing using a scenario consistent with the PRA developed Anchor Scenario. The impact of the stress on both P&L and regulatory Capital Resources and Requirements are analysed An output of the ICAAP is to identify those risks which are not included in the Pillar 1 capital adequacy calculation and to assess an appropriate additional capital requirement to be included as Pillar 2. These additional requirements may include increased allocations of capital for Operational, Market and Concentration Risk and will also propose a capital planning buffer which takes account of the impact of stress on the Group s capital position. The PRA review the ICAAP through its Supervisory Review Process ( SREP ) and set an Individual Capital Guidance ( ICG ) level which sets the minimum level of regulatory capital to be held to support Pillar 1 and 2 risks. In addition, the PRA will set a capital planning buffer which should be available to support the Business in a stress situation. 25 Section 4 : Risk Management, Objectives and Policy

34 5. Further Detail on Capital Resources, Leverage and Market, Credit and Liquidity Risk

35 5.1. Credit and Counterparty Risk (CCR) Summary Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk CCR is the risk of loss arising from a borrower or counterparty failing to meet its financial obligations. CCR Capital Requirements are derived from risk-weighted exposures, determined using the standardised approach. BAMLI has Credit Risk exposure as a result of non-trading book exposures and minimal Counterparty Risk exposure. The following section provides detailed information on BAMLI s regulatory Credit Risk exposures and is shown pre-credit risk mitigation for reporting purposes. The ratings of counterparties are derived by referring to external credit ratings provided by Moody s, Fitch and S&P for all exposure classes where possible. A financial asset is past due when the counterparty has failed to make a payment when contractually due. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. As at 31 December 2014, BAMLI s impairment for credit losses was $105m of which $67m relates to general Credit Risk adjustments. As can be seen in Figure 5, BAMLI s credit exposure is largely comprised of exposure to corporate clients in EMEA. Figure 5. Counterparty and Credit Risk Exposure Detail 26

36 Figure 6 reflects a summary of CCR exposure by Credit Quality Step ( CQS ). Further detail is provided in Section 5.2. BAMLI had increased exposure in CQS 1 and 2 in 2014 due to increased exposure to Institutions. Additionally, there has been an increase in exposure in Non-Rated CQS, where no external ratings are available for the counterparties. Figure 6. Counterparty and Credit Risk Exposure by Credit Quality Step 27 Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

37 5.2 Credit Risk Detail Credit Risk by Type Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk Tables 7 sets out the RWA and Credit Risk Minimum Capital Requirement by exposure class of counterparty. Table 8 shows exposure by industry distribution of counterparty. The majority of exposures for BAMLI are in respect of transactions with Corporates. Table 7. Counterparty and Credit Risk Minimum Capital Requirement and RWA (Dollars in Millions) RWA Capital RWA Capital Corporates 19,835 1,587 8, Institutions Institutions and Corporates with a Short-Term Credit Assessment 2, Other Total 23,482 1,879 10, Table 8. Counterparty and Credit Risk Exposure by Industry Distribution (Dollars in Millions) Institutions 5,043 2,861 Industrial and Commercial Companies 20,309 7,739 Energy and Commodities 3,010 1,132 Insurance Other Financial 5, Other Total Exposure Value 34,642 12,477 28

38 5.2.2 Credit Risk Exposure Geographic Distribution and Maturity Profile Detail Further analysis of BAMLI s exposure values demonstrating the geographical distribution, residual maturity and yearly average distribution is provided in Tables 9 and 10. The geographical distribution below is reported by analysing where the counterparty is based and is further analysed to show the breakdown by counterparty exposure class. The majority of BAMLI s exposure exists within EMEA. Table 9. Counterparty and Credit Risk Exposure by Geographical Distribution 2014 (Dollars in Millions) Asia Americas EMEA Total Central Governments or Central Banks Corporates ,678 27,723 Institutions ,351 1,409 Institutions and Corporates with a Short-Term Credit Assessment 10 2,079 2,689 4,778 Other Total Exposures 203 2,990 31,450 34,642 (Dollars in Millions) Asia Americas EMEA Total Central Governments or Central Banks Corporates ,295 9,003 Institutions ,834 2,861 Institutions and Corporates with a Short-Term Credit Assessment Other Total Exposures ,742 12, Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

39 Table 10 sets out BAMLI s Credit Risk exposure values at the end of 2014 and 2013 by residual maturity and counterparty exposure class. The total average value of the exposures for the years is also provided. Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk The majority of BAMLI s Credit Risk exposure had maturities of one to five years. Table 10. Counterparty and Credit Risk Exposure by Residual Maturity and Average Value As at end of Average One - Five Over Five Under 1 Year Total Exposure (Dollars in Millions) Years Years Central Governments or Central Banks Corporates 7,464 19,150 1,109 27,723 22,029 Institutions 1, ,409 1,029 Institutions and Corporates with a Short-Term Credit Assessment 4, ,778 3,538 Other ,367 Total Exposure Value 14,083 19,450 1,109 34,642 28,006 As at end of Average One - Five Over Five Under 1 Year Total Exposure (Dollars in Millions) Years Years Central Governments or Central Banks Corporates 1,959 5,713 1,331 9,003 4,707 Institutions 2, ,861 1,351 Institutions and Corporates with a Short-Term Credit Assessment (1) Other Total Exposure Value 4,306 6,579 1,592 12,477 6, Average Exposure (Dollars in Millions) Pre-Credit Risk Post-Credit Risk Central governments or central banks Corporates 22,029 22,029 Institutions 1,029 1,029 Institutions and Corporates with a Short-Term Credit Assessment 3,538 2,395 Other 1,367 1,367 Total Exposure Value 28,006 26,863 (1) Long-term rather than short-term ratings used when calculating RWA and capital in

40 5.2.3 Credit Risk Exposure by Credit Quality Step Table 11 analyses exposure value by exposure class and CQS showing the position pre and post Credit Risk mitigation (i.e. after collateral is offset). A CQS is a credit quality assessment scale as set out in BIPRU. The mapping table is provided by the PRA and can be accessed through the following link. The CQS is derived by referring to external credit ratings provided by Moody s, Fitch and S&P, where available. The Non-Rated CQS means no external ratings are available for the counterparties. The increase in lending activity has resulted in an increase in exposure in Non-Rated CQ. Table 11. Counterparty and Credit Risk Exposure by Credit Quality Step (Dollars in Millions) Pre-Credit Risk Mitigation Post-Credit Risk Mitigation Pre-Credit Risk Mitigation Post-Credit Risk Mitigation Central Governments or Central Banks Credit Quality Step Total Exposure Value Corporate Credit Quality Step ,417 2, ,163 4, ,108 1, NR-Non Rated 19,059 19,059 8,055 8,055 Total Exposure Value 27,723 27,723 9,003 9,003 Institutions Credit Quality Step NR-Non Rated ,580 1,094 Total Exposure Value 1,409 1,409 2,860 1,374 Institutions and Corporates with a Short-Term Credit Assessment Credit Quality Step 1 2, ,069 1, ,118 1, NR-Non Rated Total Exposure Value 4,778 2, Other Credit Quality Step NR-Non Rated Total Exposure Value Combined Total Exposure Value 34,642 32,748 12,477 10,991 Note: Long-term rather than short-term ratings used when calculating RWA and capital in Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

41 5.2.4 Credit Risk Exposure Pre and Post Credit Risk Mitigation Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk Measures for exposure value under Credit Risk for BAMLI are calculated using the standardised approach. Table 12 analyses this risk pre and post Credit Risk mitigation. Table 12. Counterparty and Credit Risk Exposure Pre and Post Credit Risk Mitigation (Dollars in Millions) Counterparty Credit Risk The capital requirements for Interest Rate PRR are reduced by Credit Derivatives purchased from BANA which give rise to CCR of $3m (2013, $2m). Table 13 analyses the notional value of BAMLI s credit derivative portfolio. Table 13. Counterparty Credit Risk Exposure Credit Derivatives Gross Exposure Pre-Credit Risk Mitigation Exposure Covered by Netting Agreement Net Credit Exposure Central Governments or Central Banks 1-1 Corporates 27,723-27,723 Institutions 1,409-1,409 Claims on Institutions and Corporate with a Short-Term Credit Assessment 4,778 1,894 2,884 Other Total Exposure Value 34,642 1,894 32,748 (Dollars in Millions) Gross Exposure Pre-Credit Risk Mitigation Exposure Covered by Netting Agreement Net Credit Exposure Central Governments or Central Banks Corporates 9,003-9,003 Institutions 2,861 1,486 1,375 Claims on Institutions and Corporate with a Short-Term Credit Assessment Other Total Exposure Value 12,477 1,486 10,991 (Dollars in Millions) Protection Bought Protection Sold Protection Bought Protection Sold Credit Derivative Products Credit Default Swaps Total Return Swaps 1,248-1,656 - Total Notional Value 1,366-1,

42 5.2.6 Impairment for Credit Losses Table 14 sets out the impairment for credit losses by counterparty type. The amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. The impairment losses are all incurred in EMEA. Table 14. Impairment for Credit Losses (Dollars in Millions) Opening balance Impairment charge for the year Closing balance Market Risk (PRR) Summary Market Risk is the potential change in an instrument's value caused by fluctuations in interest and currency exchange rates, equity and commodity prices, credit spreads or other risks. BAMLI has established trading book guidelines which set out the policies and procedures for the overall management of the trading book in accordance with the requirements of CRD IV. Table 15 presents a breakdown of PRR which is made up of the following: Interest Rate PRR Interest Rate PRR is split into two components, General Market Risk and Specific Risk: General market risk is based on a portfolio by currency basis. Positions are grouped by maturity ranging from <1 month to >20 years, with a corresponding weighting applied depending on the maturity band Specific risk looks at each security in terms of corporate / government / institution, rating and maturity Foreign Exchange PRR Foreign Exchange PRR is the risk calculated on the foreign currency exposure on the balance sheet. Table 15. Market Risk Requirement (1) Interest Rate PRR includes $39m (2013: $52m) of capital requirements in respect of securitisation exposures. Value at Risk ( VaR ) Models Corporates BAMLI does not have an approved VaR model for regulatory purposes. Institutions (Dollars in Millions) Interest Rate PRR (1) Foreign Exchange PRR 26 2 Total Market Risk Total Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

43 5.4 Capital Resources Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk The below table shows a reconciliation between the accounting balance sheet values and the regulatory capital values of the items included in BAMLI s Capital Resources. Further details on the composition of BAMLI s Capital Resources are shown in tables 17 and 18. Table 16. Regulatory Capital Resources Reconciliation to Audited Financial Statements Balance per UK GAAP Financial Statements Adj. to Balance Sheet Items for Regulatory Balance per Regulatory Capital Resources Prudential Valuation (Dollars in Millions) Adjustment Tier 1 Capital Share Capital Share Premium Capital Contribution 4,600-4,600 Profit and Loss Account and Other Reserves 494 (39) 455 Tier 1 Capital before Deductions 6,705 (39) 6,666 Deferred Tax Asset Tier 1 Capital after Deductions 6,705 (39) 6,666 Total Own Funds 6,705 (39) 6,666 Following the implementation of CRD IV on 1 st January 2014, a new requirement was introduced requiring prudential valuation adjustment to be deducted from BAMLI s Tier 1 Capital Resources. BAMLI has established a valuation control policy and prudent valuation guidelines which set out the policies and procedures for the determination of price verification and prudent valuation in accordance with the requirements of CRD IV and related interpretive guidance. 34

44 Table 17. Capital Instrument Features Capital instruments main features template 1 CET1 1 Issuer Bank of America Merrill Lynch International 2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) Private Placement 3 Governing law(s) of the instrument English Regulatory Treatment 4 Transitional CRR rules CET1 5 Post-transitional CRR rules CET1 6 Eligible at solo/(sub-)consolidated/ solo & (sub-)consolidated Solo 7 Instrument type (types to be specified by each jurisdiction) Ordinary shares with full voting rights 8 Amount recognised in regulatory capital (currency in million, as of most recent reporting date) $1,611m comprising nominal and premium 9 Nominal amount of instrument $1.00 9a Issue price $1.00 9b Redemption price N/a 10 Accounting classification Shareholders equity 11 Original date of issuance 6 Sept 95 $18m 13 Nov 98 $72m 21 Dec 98 $150m 06 Sept 99 $188m 26/ Sept 05 $254m 12 Dec 06 $208m 12 Perpetual or dated Perpetual 13 Original maturity date No maturity 14 Issuer call subject to prior supervisory approval No 15 Optional call date, contingent call dates and redemption amount N/a 16 Subsequent call dates, if applicable N/a Coupons / Dividends 17 Fixed or floating dividend/coupon Floating 18 Coupon rate and any related index N/a 19 Existence of a dividend No 20a Fully discretionary, Fully discretionary 20b Fully discretionary, Fully discretionary 21 Existence of step up No 22 Noncumulative or Non-cumulative 23 Convertible or non- Non-convertible 24 If convertible, N/a 25 If convertible, fully or N/a 26 If convertible, N/a 27 If convertible, N/a 28 If convertible, specify N/a 29 If convertible, specify N/a 30 Write-down features No 31 If write-down, write- N/a 32 If write-down, full or N/a 33 If write-down, N/a 34 If temporary write- N/a 35 Position in N/a 36 Non-compliant N/a 37 If yes, specify non- N/a 35 Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

45 Table 18. Common Equity Tier 1 Capital Instruments and Reserves (dollars in millions) Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk Common Equity Tier 1 Capital: Instruments and Reserves (A) Amount at Disclosure Date (B) Regulation (EU) No 575 / 2013 Article Reference 1 Capital instruments and the related share premium accounts 1, (1), 27, 28, 29, EBA list 26 (3) of which: Ordinary shares with full voting rights 1,611 EBA list 26 (3) 2 Retained earnings (1) (c) 3 Accumulated other comprehensive income (and other reserves, to 4, (1) include unrealised gains and losses under the applicable accounting standards) 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 6,705 Common Equity Tier 1 (CET1) Capital: Regulatory Adjustments 7 Additional value adjustments (negative amount) (39) 34, Total Regulatory Adjustments to Common Equity Tier 1 (CET1) (39) 29 Common Equity Tier 1 (CET1) Capital 6, Tier 1 Capital (T1 = CET1 + AT1) 6, Total Capital (TC = T1 + T2) 6, Total Risk Weighted Assets 24,784 Capital Ratios and Buffers 61 Common Equity Tier 1 (as a percentage of risk exposure amount) 26.9% 92 (2) (a), Tier 1 (as a percentage of risk exposure amount) 26.9% 92 (2) (b), Total capital (as a percentage of risk exposure amount) 26.9% 92 (2) (c) 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount) 18.9% CRD (C) Amounts subjected to preregulation (EU) No 575 / 2013 treatment or prescribed residual amount of regulation (EU) No 575 / 2013

46 5.5 Leverage Leverage Approach The leverage ratio for a quarter-end is calculated as the arithmetic average of the three month end ratios calculated over the quarter. The measure of Tier 1 capital used in the computation of BAMLI s ratio is the same under both transitional and fully phased in definitions of Tier 1 capital per CRD IV. The leverage ratio is calculated and monitored in line with regulatory requirements. Exposure is typically managed through a combination of mechanisms including risk appetite limits, collateralisation and netting arrangements Additional Detail on Leverage Ratio Table 19. Summary Reconciliation of Accounting Assets and Leverage Ratio Exposures Applicable Amounts (Dollars in Millions) Total Assets as per Published Financial Statements 21,377 Adjustment for Entities which are Consolidated for Accounting Purposes but are Outside the Scope of Regulatory Consolidation - Adjustment for Fiduciary Assets Recognised on the Balance Sheet Pursuant to the Applicable Accounting Framework but Excluded from the Leverage Ratio Exposure Measure According to Article 429(11) of Regulation (EU) NO. 575/ Adjustments for Derivative Financial Instruments (87) Adjustments for Securities Financing Transactions - Adjustment for Off-Balance Sheet Items (ie conversion to credit equivalent amounts of off-balance sheet exposures) 7,544 Other Adjustments (2,246) Leverage Ratio Exposure 26,588 Table 20. Leverage Ratio Common Disclosure CRR Leverage Ratio (Dollars in Millions) Exposures On-Balance Sheet Exposures (excluding derivatives and SFTs) On-Balance Sheet Items (excluding derivatives and SFTs, but including collateral) 19,021 Asset Amounts Deducted in Determining Tier 1 Capital (39) Total On-Balance Sheet Exposures (excluding derivatives and SFTs) 18,982 Derivative exposures Replacement Cost Associated with Derivatives Transactions 0 Add-on Amounts for PFE Associated with Derivatives Transactions 62 Total Derivative Exposure 62 Off-Balance Sheet Exposures Off-Balance Sheet Exposures at Gross Notional Amount 14,907 Adjustments for Conversion to Credit Equivalent Amounts (7,363) Total Off-Balance Sheet Exposures 7,544 Capital and Total Exposures Tier 1 Capital 6,666 Exposures of Financial Sector Entities According to Article 429(4) Second Subparagraph of Regulation (EU) NO. 575/ Total Exposures 26,588 Leverage Ratios End of Quarter Leverage Ratio 25.1% Leverage Ratio (avg of the monthly leverage ratios over the quarter) 24.1% Choice on Transional Arrangements and Amount of Derecognised Fiduciary Items Choice on Transitional Arrangements for the Definition of the Capital Measure Fully phased-in Amount of Derecognised Fiduciary Items in Accordance with Article 429(11) of Regulation (EU) NO. 575/ Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk

47 Table 21. Split of On-Balance Sheet Exposures (excluding derivatives and SFTs) Section 5 : Further Detail on Capital Resources, Leverage and Market, Counterparty, Credit and Liquidity Risk CRR Leverage Ratio (Dollars in Millions) Exposures Total On-Balance Sheet Exposures (excluding derivatives and SFTs), of which: 19,021 Trading Book Exposures 1,242 Banking Book Exposures, of which: 17,779 Central Governments and Central banks 1 Institutions 1,315 Corporates 12,854 Other 3,609 38

48 6. Additional Information on Remuneration Disclosure

49 6.1 Remuneration Disclosure Remuneration disclosures are reported at a UK level in respect of the Remuneration Code and as required under CRD IV. These remuneration policies include the breakdown of remuneration of staff by business collectively for all BAC entities operating in the UK and are not specific to BAMLI. These remuneration disclosures are therefore separately published on BAC s corporate website ( and should be deemed part of the Pillar 3 Disclosure for BAMLI. Section 6 : Additional Information on Remuneration Disclosure 39