In accordance with the article of The Law on Central Bank (The Bank of Mongolia), it is hereby decreed:

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1 DECREE OF THE GOVERNOR OF THE BANK OF MONGOLIA Date: July 30, 2010 No. 460 Ulaanbaatar Re: Approving and updating the regulation In accordance with the article of The Law on Central Bank (The Bank of Mongolia), it is hereby decreed: 1. The regulation on setting and monitoring prudential ratios to banks is renewed and approved as shown in the annex to this decree. 2. The Article of this regulation shall be effective from January 1, 2011 and the Article shall be effective from January 1, Subsequent to the release of this decree, The Governor s decree numbered 491 of the BOM dated on October 30 th, 2007 is annulled. 4. The minimum requirement on the ratio of Bank Capital to Risk-Weighted Assets ratio is set at 12 percent whereas the minimum requirement on the ratio of Tier 1 Capital to Risk-Weighted Assets is set at 6 percent accordingly. 5. Compliance and fulfillment to this decree are to be assigned to the Supervision Department (Mr. Lkhagvasuren. B). THE DEPUTY GOVERNOR OF THE BANK OF MONGOLIA Duly signed and stamped JAVKHLAN. B Decree 2010.doc

2 THE REGULATION ON SETTING AND MONITORING PRUDENTIAL RATIOS TO BANKING OPERATION ONE. General Provision Annex of the decree #460 of The Governor of the Bank of Mongolia on July 30, The purpose of this regulation is to set the prudential ratios by Bank of Mongolia (BOM) intended to assess the compliance of the requirements prescribed in the Article of the Banking Law and monitor its compliance Banks shall assess the possible risk events and occurrences that may arise in its daily operation according to the following prudential ratios Capital adequacy ratio; Liquidity ratio; Credit concentration risk ratio; Forex risk ratio Banks shall take measures to assess and prevent possible risks by correctly determining the prudential ratios prescribed in the Article 1.2 of this regulation as well as assessing and reviewing the underlying factors and reasons that influenced their changes Banks may develop and adopt additional supplementary internal regulations other than the prudential ratios stated in article 1.2 of this regulation in order to assess, control over and manage all types of risks in its daily operations. These internal regulations shall meet the requirements stipulated in this regulation Terms used in this regulation shall have following meaning: Bank capital stands for share capital (including common stocks, preferred stocks and treasury stocks), other equity (including additional paid-in capital, revaluation surplus and donated capital) and retained earnings or losses, subordinated debt and social development funds. Tier-1 capital consists of share capital (common stocks, treasury stocks and preferred stocks that meet requirements stated in article of this regulation), reserve funds built from net profits and retained earnings and losses, additional paid-in capital (of common stocks) and donated capital. Tier-2 capital comprises, as prescribed by the Article of this regulation, preferred stocks, additional paid-in capital (of preferred stocks), revaluation surplus and social development fund portions of which are not included in the Tier-I capital and subordinated debts with maturity of more than 5 years Capital adequacy means the assessment stipulated in article of the Banking Law of Mongolia.

3 Capital requirement means value stipulated in the Article of the Banking Law of Mongolia Subordinated debt refers to the debt obligation which, upon its maturity to be converted into stocks by the approval of investors meeting and the provisions of which must be clearly stipulated in the relevant agreement. It is prohibited for banks to redeem the principal payment of the subordinated debts before its maturity unless the bank is liquidated, went bankrupt, declared insolvent or given permission by the Bank of Mongolia in advance. In case where bank becomes insolvent or is liquidated or went bankrupt, subordinated debts shall be registered under the item Other payables for the repayment order of creditor s claims with the money recovered from the assets sale of the bank Related party is the entity stated in the Article of the Banking Law of Mongolia General risk level of a bank is to be defined on a basis of The regulation on maintaining full-scope on-site examination and evaluation of the bank s operation and its financial position Forex risk means risk that the bank may incur loss from the fluctuation in the exchange rate of Tugrug against other foreign currencies Foreign currency open position refers to the net difference between the sum of on-balance foreign currency assets and foreign currency receivables from offbalance sheet items and on-balance foreign currency liabilities and foreign currency payables from off-balance items Foreign currency open short position refers to absolute value of the net difference stated in the Article of this regulation when the net difference is negative Foreign currency open long position refers to absolute value of the net difference when net difference in article of this regulation is positive Foreign currency closed position refers to the case where the net difference in article of this regulation equals to Foreign currency open position limit refers to the limits set on the ratio of both the open-long or open-short position in foreign currency to the banking capital either in terms of a single foreign currency or overall foreign currencies Market risk refers to risk to incur loss from fluctuations in the foreign currency exchange rate, interest rate and price level Value-at-Risk (hereinafter referred to as VAR) refers to the maximum amount of loss that may incur from the portfolio of financial products in particular period with given probability Stress test refers to methodology to determine contingent loss that may arise from the result of changes in the risk factors deemed to be less-likely but possible to occur Backtesting refers methodology to test the predictive power of the chosen risk model by comparing it with the actual data Marginal VaR refers to the measure of change in portfolio VaR as a result of inserting an additional adding additional tugrik to a component Incremental VaR refers to the measure of change in portfolio VaR due to a new position on the portfolio Components VaR refers to metrics that measures the change in VaR if a given position was closed.

4 Stressed VaR refers to calculation of VaR based on historical data from the period where a bank had a significant financial difficulty within 12 months Financial assets refers to cash and its equivalents or intangible assets that can be converted into cash when their contractual claim matures Financial liabilities refers to intangible liabilities to be paid in form of money once contract/agreement matures Operational risk refers to risk that a bank may incur loss from the inadequacy of internal control system, unethical actions from employees, information system malfunctioning, sudden incidents and/or other external factors to the bank Systemically important bank refers to a bank that has a market share of 5 percent or above of the banking sector s assets in the last 6 months. /Decree of Governor of the Bank of Mongolia, 726, December 14, 2011/ TWO. Capital adequacy 2.1. Capital adequacy of the bank shall be determined based on following ratios The capital to risk-weighted assets ratio; Tier-1 capital to risk-weighted assets ratio; Additional capital requirement for systemically important bank shall be set by the Governor s decree of the BOM, if deemed necessary /Decree of Governor of the Bank of Mongolia, 726, December 14, 2011/ 2.2. Capital requirement shall be set by the Governor s decree of the BOM If general risk level of a particular bank exceeds systemic average of the overall banking system, the capital requirement for that bank may be set higher than stipulated in article 2.2 of this regulation by the decision of the Governor of the BOM Capital to risk weighted assets ratio is calculated as the capital adjusted as stipulated in the Article 2.6 of this regulation divided by the risk weighted assets stated in the Article 2.7 of this regulation. This ratio shall not be less than the capital requirement on a stand-alone basis for both subsidiary and parent company as well as for their consolidated financial statements The Tier-1 capital to risk weighted assets ratio is calculated as Tier-1 capital adjusted as stipulated in the Article 2.6 of this regulation divided by the risk weighted assets stated in the Article 2.7 of this regulation. This prudential ratio shall not be less than the capital requirement on a stand-alone basis both for subsidiary and a parent company as well as for their consolidated financial statements The capital is adjusted as follows to calculate the capital adequacy of the bank: Aside from the provision stated in the Article 16.3 of the Banking law, in case a bank were to make investment either directly or indirectly via third party to other banks or non-bank financial institutions, 75 percent of the invested capital shall be deducted from the Tier 1 capital whereas the remaining 25 percent shall be deducted from the Tier 2 capital of the bank. /Decree of Governor of the Bank of Mongolia, 726, December 14, 2011/ Tier 2 capital in aggregate shall not exceed the amount of tier 1 capital; /Annulled by Decree of Governor of the Bank of Mongolia, 726, December 14, 2011 and reintroduced by Decree of Governor of the Bank of Mongolia, A-122, July 30, 2014/ The amount of subordinated debts acceptable to be included in the Tier 2 capital shall be limited up to 50 percent of tier 1 capital; /Annulled by Decree of Governor of the

5 Bank of Mongolia, 726, December 14, 2011 and reintroduced by Decree of Governor of the Bank of Mongolia, A-122, July 30, 2014/ Adjustment and reconciliation entries to the due accounts shall be executed to determine the actual value of the capital consequent to the breach and infringements revealed by the preliminary and/or sequential supervision and inspection; Acceptance of the amount of perpetual preferred stocks outstanding that do not accrue dividend payments as a share of the Tier 1 capital shall not exceed 15 percent of it The supervisor, if deemed necessary, is allowed to deduct the revaluation surplus of a particular immovable asset from tier-2 capital on grounds of adequacy of the valuation, market price fluctuation, contingent loss that may arise from fire sale Goodwill shall be deducted from tier1 capital Risk weighted assets is calculated as the weighted sum of on balance assets and off-balance contractual contingencies and obligations with the risk-weights specified in the Annex 1 of this regulation, adjusted by the following: Adjustments stated in article 2.6.1, 2.6.3, 2.6.4, and other adjustments shall be made into their respective asset accounts The credit-equivalent amount of the financial derivatives shall be calculated in accordance with the methodology stipulated in Annex 7 of this regulation The risk weights for claims on foreign banks and the exposures backed by the foregin bank guarantees shall be determined based on the table below where the corresponding risk-weights are mapped to the ratings assigned by the internationally recognized rating agencies such as Standard and Poors, Moody s, Fitch and others. Standard & Poors AAA A+ / BBB+ / BB+ / B- below Fitch /AA- A- BBB- B- Moody s Aaa/Aa3 A1/A3 Baa1/Baa3 Ba1/B3 B- below Unrated Long-term claims (more than 3 months) Short-term claims (up to 3 months) 20% 50% 50% 100% 150% 100% 20% 20% 20% 50% 150% 100% For banks authorized to apply Value at risk method shall calculate the unexpected loss due to foreign exchange rate adjustments shall add the product of the amount stated in the Article 5.13 of this regulation with the inverse of the capital requirement. For other banks, the aggregate open position mentioned in the Article 5.6 of this regulation shall be added instead To prevent potential loss that may arise from the operational risk, bank shall add 15 percent of the average of the positive profits before tax during last three years multiplied by the inverse of the capital requirement. THREE. Liquidity risk 3.1. Bank shall estimate and evaluate liquidity ratio indicators (hereafter referred to as liquidity ratio) internally to assess the ability of the bank to grant the claims of the customers and depositors at their first demand Liquid assets equal the sum of cash in hand, Central bank bills, deposits (current and savings accounts) placed in BOM and other foreign and domestic banks less the balance of transfer

6 delays in the clearing account. The securities, the maturity and interests of which were not specified in the contract or their rights to redeem were not been granted to the holder, the claims on banks which had their license revoked by the BOM, liquidated, went bankrupt, with appointed conservator and receiver or encumbered deposits in the forms of collaterals contracted to be enforced to other banks shall not be included in the liquid assets The total liabilities shall be estimated as the sum of all types of current and savings account by state budget, banks, corporate and other entities, and individuals, loans outstanding to the BOM and other banks, funding and investments from non-bank institutions and other liabilities less the transfer delays in the clearing account The liquidity ratio shall be calculated as the liquid assets divided by the total liabilities on a standalone basis by tugrik, minimum requirement for the liquidity ratio shall be set by the Governor s decree of the BOM. /Decree of Governor of the Bank of Mongolia, 691, November 25, 2011/ 3.5. Bank shall execute the forecasts for funding inflows and outflows for financial receivables and/or financial payables on a daily, weekly (5 working days) and a monthly basis with both tugrik and foreign currencies. In estimating the forecast, bank shall take into account both the on- and offbalance funding flows as shown in the Annex 6 of this regulation. FOUR. Credit concentration risk 4.1. The compliance of the provision mentioned in the Article 17.1 of the Banking Law shall be evaluated as shown in the Annex 3 of this regulation In case where the total exposures of loan, credit equivalent assets and guarantees issued to single borrower or its related entities exceed 5 percent of banking capital, a bank shall notify the BOM each time such incidence occurs The compliance of the provision mentioned in the Article 17.3 of the Banking Law shall be evaluated as shown in the Annex 4 of this regulation If it is found that loans, credit equivalents and guarantees extended to the related parties of the bank are being utilized for the purpose of financing a single project or the usage of a particular loan is uncertain, BOM can aggregate these exposures to calculate the limits stipulated in the Article 17.3 of the Banking Law Bank shall set and follow the adequate internal limits of the credit concentration risk in terms of geographical location, economic sector, usage, collaterals and guarantees internally The indicators stated in the Article 4.1 and 4.3 of the regulation are estimated with the amount of banking capital subsequent to all required adjustments except mentioned that in the Article 2.16 of Regulation on Asset Classifying, Provisioning and Its Allocations. FIVE. Foreign exchange rate risk 5.1. Forex ratio shall be calculated for open position both as a standalone for a particular foreign currency or the aggregate foreign currencies The difference on the assets and liabilities for a single foreign currency shall be estimated as the sum of the following: Net spot position - that is the difference between on-balance foreign currency assets and liabilities in (of which, the accrued interests are included and the spot rate of gold shall be applied for the estimation of the gold value); The difference between off-balance receivables and payables of forward, futures and swap deals in foreign currency (as for the swap deal, the part associated with the spot deal shall be deducted and their future inflows and outflows shall be evaluated at the spot rate);

7 Negative sum of guarantee, warranty and other off-balance contingent liabilities which are certain to be settled under contractual obligation The difference between revenue and expense transactions validated by relevant contracts which deemed certain to be exercised in the future The delta value of foreign currency option The foreign currency exposure report shall include the derivatives, guarantees, L/Cs, revenues and expenses and options in foreign currencies which are only to be exercised within the next 6 months of the reporting period The amount of open position in a single foreign currency shall not exceed 15 percent of the bank s adjusted capital stipulated in the Article 2.6 of this regulation The total open position equals the higher of the absolute sum of the long positions or short positions in individual foreign currencies plus the absolute value of open gold position, if any The total open position shall not exceed the 40 percent of the bank s adjusted capital stipulated in the Article 2.6 of this regulation A bank may estimate forex risk prudential ratio with VaR methodology (Please see Annex 10). In order to apply this methodology, bank is required to obtain additional permission from the Supervision Department of the BOM. The limitations stated in the Article 6.5 and 6.7 of this regulation shall not be applied to those banks with such permission The Supervision Department of the BOM shall grant the permission to apply VaR method to the bank that meets following criteria for the internal structuring, of which: To have the adequate system in which the independent individual unit or division of a bank, by the specified mathematical and statistical modeling, calculates the potential unexpected loss that the bank may incur on a daily basis and duly reports the results to the management; The managing body of the risk management unit has the right to manage the assets and liabilities at-risk as well as the off-balance assets and uses the risk assessments by the specific modeling and software to determine its trading limits; to have the specific regulation, guidance or guidelines pertaining to the risk management issues, in particular the rights, duties and accountabilities of the staffs approved by a bank; The internal auditing unit or division must include the following in their internal reports or legislative documents, of which: - The status of completion of documents relating to the risk management activities; - The organizational structure of the risk management unit/division, the status of application of risk assessment; - Whether the management of the bank validates the models applied by the treasury and back offices to determine the risk assessments and their changes; - If the market risk assessment of chosen model is credible enough; - The level of safety and reliability of the management information system applied; - The completeness and fairness (accuracy) of the information applied in estimation and analysis; - The reliability and the timeliness of the information and data used for risk estimation and the independence of the institution that receives the information. - The accuracy in estimation of exchange rates fluctuations and the correlations them; - The credibility of the risk assessment; - Whether they have made regular comparisons between risk assessments by specified models with the actual losses.

8 Bank, in addition to estimating the unexpected losses due to the exchange rate fluctuations with VaR methods, must conduct stress testing with relevant market factors. In regards to the above, banks shall take into account the scenarios where the bank may incur large amount of losses or the credibility of risk management is deteriorated as well as the linear and non-linear relations between relevant factors Bank may conduct stress test in following manners: - Using exchange rates changes stated in the Annex 13; - Using extreme value distributions methods mentioned in Operational risk guidance ; - Utilizing other mathematical and statistical models The software applied market risk assessment shall meet the following numerical criteria: to have a capacity to estimate VaR, marginal VaR, incremental VaR, and component VaR on a daily basis; Loss estimates with VaR method shall have 99% probability in which the density function of the random variables with normal distributions are used The value of VaR shall be calculated with exchange rate fluctuations within 10-day period. If period need to be shorter than 10 days, it shall be scaled by square root of time and the bank shall have received the prior permission to apply such method from the BOM. The bank authorized to implement such assessment shall, to ensure the credibility and objectivity of the method, be subject to validation test by the BOM once in a year The sampling method shall be used for estimating exchange rate deviations with at least 250 observations comprising 5-year time-series data. (For banks that apply weighted average and other methods, the distance between weighted average periods shall not be less than 6 months. In case the exchange rate fluctuation is deemed high, the supervisory authority may curtail the initial duration of the fluctuation) To be able to update the database applied at least once every month and if necessary, update it less frequently The stressed VaR shall be estimated weekly using the same methods for the normal VaR and in so doing, the input data shall include 250 past, independent observations deemed to have caused the large losses for the bank. The selected past observation are subject to quarterly review by the BOM In order to be granted the permission to apply the market risk estimation methods, the bank shall, during the preceding one year, have estimated using variance-covariance, historical simulation and Monte-Carlo simulation and other approaches as well as met the other requirements stated in this regulation before officially applying for request to employ such method. The Supervision Department of the BOM grants the permission for a bank to employ its chosen model after ensuring that the model was validated by the back-testing shown in the Annex 11 along with the bank meeting other criteria stated in this regulation A decision to incorporate the correlation between various types of risks in the model shall be made subject to the prior permission by the Supervision Department of the BOM The amount to be added to the risk weighted assets stated in the Article of this regulation shall be calculated as the higher of the previous-day VaR and the product of the average of VaR during the last 60 days and the multiplier, plus the higher of the latest stressed VaR or the product of average of the stressed VaR during the last 60 days and the special multiplier. The multiplier shall be determined based on the results of the back-testing stated in the Article 11 of this regulation where as the special multiplier shall be determined within 3 to 4 based on the results of the chosen model.

9 5.13. A bank shall conduct the comparative analysis of the risk estimates by VaR method against the actual losses on a monthly basis as well as the results of stress tests on a quarterly respectively and shall submit the results to the Supervision Department of the BOM In case where the BOM deems that the emergency situation had occurred in the market and requires a bank to conduct stress testing, the bank shall comply and submit the results to the Supervision Department of the BOM. SIX. Fixed asset ratio 6.1. The limits on the fixed assets, in order to incentivize banks to undertake core business activity the extension of loans, are imposed The fixed asset ratio is calculated as total fixed assets divided by the total assets of the bank. This ratio shall be no more than 8 percent. SEVEN. Miscellaneous provisions 7.1. The Supervision Department of the BOM shall monitor the compliance of the prudential ratios to the banks and, if deemed necessary, shall undertake supervision and take further relevant actions Banks are required to submit the reports below to the Supervision Department of the BOM both as a hardcopy and electronic file format no later than 5 th day of the next month Capital adequacy ratio report /Annex 1/; Report of exposures and other credit equivalent assets to the largest borrowers of the bank /Annex 2/; Report on exposures and other credit equivalent assets issued to bank shareholder, staffs and its related parties /Annex 3/; Report on off-balance sheet items - guarantee, collateral, L/C and other contingent liabilities /Annex 4/; Maturity mismatch report of the assets and liabilities /Annex 5/; Cash flow report on financial payables and receivables /Annex 6/; Forex risk report on a daily basis of the reporting month /Annex 7/; General information of the bank /Annex 8/; Report on claims from foreign country /Annex 9/ Forex risk reports /Annex 7/ must be submitted daily to the International Economics Department of the BOM in electronic format If the infringements to this regulation do not constitute a criminal offense, the penalties shall be imposed to the perpetrator in accordance with the banking legislation ooooo

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