Bank of America : Merrill Lynch Bank and Trust Company (Cayman) Limited 2023 Annual Report

Detailed Table of Contents

1. Overview and purpose of document ...................................................................................3

2. Risk Management ................................................................................................................4

3. Financial Statements ............................................................................................................6

4. Capital ..................................................................................................................................8

5. Credit Risk ............................................................................................................................9

6. Counterparty Credit Risk ........................................................................................ 14

7. Leverage ratio ...................................................................................................................... 16

8. Liquidity ............................................................................................................................... 17

9. Market Risk .......................................................................................................................... 17

10. Operational risk ................................................................................................................. 18

11. Interest rate risk in the banking book ............................................................................... 19

1. Overview and purpose of document

This document contains the Pillar 3 disclosures as at December 31, 2023 in respect of capital and risk management for Merrill Lynch Bank and Trust Company (Cayman) Limited ("MLBTC"),The document provides details on the capital resources available to MLBTC ("Capital Resources") and the regulatory defined Pillar 1 minimum capital requirements for MLBTC ("Minimum Capital Requirements"), and demonstrates that MLBTC has Capital Resources in excess of these requirements and robust risk management and controls.

MLBTC Company overview

Merrill Lynch Bank and Trust Company (Cayman) Limited (the "Company"), is a wholly owned subsidiary of Merrill Lynch Cayman Holdings Incorporated, which in turn is a wholly-owned subsidiary of Merrill Lynch International, LLC. The Company is an indirect wholly-owned subsidiary of Bank of America Corporation ("BAC"). The Company is registered under the laws of the Cayman Islands and holds a Category "B" Banking and Trust License subject to the provisions of the Banks and Trust Companies Act. The Company is regulated and supervised by the Cayman Island Monetary Authority ("CIMA"). The Company holds a Securities Investment Business License pursuant to Section 6 (1) of the Securities Investment Business Act as a Broker-Dealer and Securities Arranger. The Company's activities align with BAC's Merrill Lynch and Global Banking and Markets divisions.

MLBTC's Capital Position as at December 31, 2023

MLBTC has capital resources of $738 million, which are Tier 1 Capital. Total Capital and Tier 1 Capital Ratios of 46% respectively and a surplus over Total Minimum Capital requirements of $545 million.

Basis of Preparation

The information contained in these disclosures has been prepared in accordance with the disclosure requirement of Pillar 3 under the Basel II framework. The information is not directly comparable with the annual financial statements.

The document has been prepared purely to comply with Pillar 3 disclosure rules, for the purpose of explaining the basis on which MLBTC has prepared and disclosed certain information about the management of risks and regulatory capital adequacy concepts and rules, and for no other purpose. It therefore does not constitute any form of financial statement on MLBTC 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.

These Pillar 3 disclosures are published on the Investor Relations section of BAC's corporate website:

http://investor.bankofamerica.com/

2. Risk Management

MLBTC is integrated into and adheres to the global BAC Group management structure and risk management and oversight framework, as adapted to reflect local business, legal and regulatory requirements.

BAC has an established risk governance framework (the "Risk Framework") which serves as the foundation for consistent and effective management of risks facing BAC and its subsidiaries. The Risk Framework sets forth roles and responsibilities for the management of risk by Front Line Units ("FLUs"), independent risk management, other control functions and Corporate Audit, and provides a blueprint for how the Boards of Directors establish risk appetite and associated limits for their entity's activities. The Risk Framework describes the five components of BAC's risk management approach and the seven key types of risk faced by BAC and its subsidiaries. MLBTC integrates into and adheres to the global management structure and risk management and oversight framework, as adapted to reflect local business, legal and regulatory requirements.

BAC adopted the 2024 Risk Framework in December 2023.

The Enterprise Risk Framework consists of five components that apply to all employees and MLBTC:

• • Culture of managing risk well

• • Risk appetite and risk limits

• • Risk management processes

• • Risk data management, aggregation and reporting

• • Risk governance

Focusing on these five components allows effective management of risks across the seven key types of risk faced by MLBTC's businesses, namely: Strategic, Credit, Market, Liquidity, Operational, Compliance and Reputational.

Risk Appetite

MLBTC adheres to BAC's line of business Risk Appetite Statement which, together with the BAC Risk Framework, provides MLBTC with the basis to establish and execute risk taking activities in a manner consistent with the aggregate risk appetite of BAC. The Risk Appetite Statement refers to, and should be read in conjunction with, the Risk Framework. BAC's Risk Appetite Statement clearly defines the amount of capital, earnings or liquidity that it is willing to put at risk (over a certain time period with a given likelihood of occurring), to achieve its strategic objectives and business plans, consistent with applicable regulatory requirements.

The BAC Risk Appetite Statement is rooted in the following principles:

• • Overall risk capacity: BAC's overall capacity to take risk is limited, therefore risk prioritization occurs. BAC's risk capacity informs its risk appetite, which is the level and types of risk that the entity is willing to take to achieve its business objectives

•

Financial strength to absorb adverse outcomes: BAC maintains a strong and flexible financial position so it can weather challenging economic times and take advantage of organic growth opportunities. Therefore, objectives and targets will be set for capital that permit BAC to continue to operate in a safe and sound manner at all times, including during periods of stress

•

Risk-reward evaluation: Risks taken are aligned to risk appetite and offer acceptable risk-adjusted returns for shareholders

•

Acceptable risks: BAC considers all types of risk including those difficult to quantify. Qualitative guidance within the Risk Appetite Statement describes the approach taken to manage risks in a manner consistent with MLBTC's culture

•

Skills and capabilities: BAC seeks to assume only those risks where appropriate skills and capabilities are present to identify, measure, monitor and control them

•

Governance, Reporting and Monitoring: MLBTC has a suite of regular reporting to monitor key metrics as part of the operational activities which are presented to the Board. A clear governance and breach escalation process is adopted as appropriate

Risk Management Processes

MLBTC adopts a comprehensive approach to risk management processes, which include:

• • All employees are responsible for proactively managing risk

• • Risk considerations are part of all daily activities and decision-making

• • MLBTC encourages a thorough challenge process and maintain processes to identify, escalate and debate risks

• • MLBTC utilizes timely and effective escalation mechanisms

FLUs have primary responsibility for managing risks inherent in their businesses. MLBTC employs an effective risk management process, referred to as "identify, measure, monitor and control" as part of the daily activities.

Risk Data Management, Aggregation and Reporting

Effective risk data management, aggregation and reporting provide a clear understanding of material current and emerging risks and enable MLBTC to proactively and effectively manage risk. MLBTC adopts the following "risk data management, aggregation and reporting principles":

• • Complete, accurate, reliable and timely data

• • Clear and uniform language to articulate risks consistently across MLBTC

• • Robust risk quantification methods

• • Timely, accurate and comprehensive view of all material risks, including appropriate level of disaggregation

The Risk Framework allow effective management of risks across the seven key types of risk faced by MLBTC. Consideration of all key risks in the capital adequacy assessment is a guiding principle for the ICAAP. Both quantitative and qualitative methods are used to ensure capital is assessed for all key risks. MLBTC has adopted the BAC Risk Framework to identify, assess and mitigate its risks.

These risks are reported to senior management and the MLBTC Risk Oversight Committee ("ROC") quarterly. This report, which is produced by Global Risk Management ("GRM"), provides senior management and the MLBTC ROC with a view of key risks facing MLBTC.

Culture of Managing Risk Well

A culture that instills the importance of managing risk well ensures appropriate focus on risk in all activities and that risk is everyone's responsibility. It encourages the necessary mind-set and behaviour to enable effective risk management and promote sound risk-taking within risk appetite. Individual accountability is the cornerstone of MLBTC's culture. The culture requires that risks are promptly identified, escalated and debated, thereby benefiting the overall performance of MLBTC.

MLBTC Escalation Approach

MLBTC will adhere to BAC standards and will promptly report material operational losses. For any loss over $100,000, a root cause analysis will be performed and presented to the ROC. Additionally, all material credit metrics are reviewed at the ROC. Breaches will be escalated to the MLBTC Board promptly and remediation actions will be discussed. Market Risk and Liquidity Risk are expected to be immaterial. However, in the unlikely event there is a significant exposure, action will be taken to determine both the root cause and remediation steps.

Risk Monitoring and Measurement

GRM reports and monitors compliance with liquidity risk limits, including the Minimum Liquidity Ratio ("MLR"), and MLBTC's liquidity risk profile under baseline and stress scenarios.

MLBTC maintains a formal Liquidity Risk Management Framework and adheres to the MLR. Under the Liquidity Risk Management Framework, MLBTC is governed by both the MLBTC Liquidity Risk Policy ("MLBTC Policy") and the MLBTC Contingency Funding Plan ("CFP"), in addition to the BAC-level documents noted above. The MLBTC Policy outlines entity specific liquidity risk practices, as well as roles and responsibilities. The CFP addresses the strategy for handling liquidity crises and cash flow shortfalls. The MLBTC Policy and CFP provide additional requirements for reporting, stress testing, risk limits, roles and responsibilities, and regulatory requirements for MLBTC beyond those described in the BAC Policy.

Stress Testing

Stress testing is conducted to determine the incremental capital MLBTC would require to withstand a severe adverse scenario. Baseline and stress test forecasts are prepared at legal entity level and informed by line of business plans and overall legal entity strategy.

2.1 Overview of Risk Weighted Assets

Risk weighted assets increased from $1.5 billion to $1.6 billion for the year ended December 31, 2023 primarily driven by higher MLR cash balances.

2.2 Table - OV1 - Overview of Risk Weighted Assets

3. Financial Statements

The consolidated financial statements are presented in accordance with United States Generally Accepted Accounting Principles. Intracompany transactions and balances have been eliminated in consolidation. There are no differences between regulatory exposure amounts and carrying values in financial statements.

3.1 Table - LI1 - Differences between accounting and regulatory scopes of consolidation and mapping of financial statements with regulatory risk categories

There are no differences between accounting amounts, as reported in the financial statements and regulatory exposure amounts.

In the normal course of business, the Company enters into loans with clients. The Company's secured loan portfolio is comprised of securities-based lending transactions which are re-margined daily. These loans are primarily collateralized by diversified marketable securities (equities and bonds) and other financial assets held by affiliates of the Company.

The client is required to post collateral in excess of the value of the loan and the collateral must meet marketability criteria. The Company performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks and to assess overall collectability through daily re-margining over the life of the loan. Given that these loans are fully collateralized by marketable securities, credit risk is negligible and reserves for credit losses are only provided for in rare circumstances.

The fair value of derivative instruments is primarily derived using other market based pricing parameters such as currency rates.

4. Capital

MLBTC is a wholly owned subsidiary of BAC. MLBTC is a bank incorporated in Grand Cayman, Cayman Islands.

MLBTC's capital is managed by taking into consideration external regulations, internal requirements, and approaches to prevent a regulatory breach as well as outlining the approach to capital actions. This also includes the monitoring of key ratios and capital adequacy assessment processes to support the future capital needs of businesses under stress and normal operating conditions.

MLBTC's capital position and requirements are regularly calculated and reported to senior management and reviewed with the MLBTC Board of Directors.

Additionally, MLBTC prepares an Internal Capital Adequacy Assessment Process ("ICAAP") document annually. The ICAAP assesses the capital adequacy of MLBTC in relation to current and future activities and ensures that MLBTC maintains an appropriate amount of capital relative to the risks to which it is exposed. The ICAAP forms a key part of the governance framework, and covers MLBTC risk appetite, strategy and financial plans, capital and risk management, and stress testing. The ICAAP is approved by the MLBTC Board of Directors.

4.1 Table - Capital Structure

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4.2 Table - Capital Adequacy

5. Credit Risk

Credit Risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its obligations. MLBTC has adopted BAC established policies to control credit risk that include, but are not limited to, authorization procedures, limit setting and monitoring. Loans with collateral positions concentrated by issuer or with non-marketable securities are subject to heightened review and credit approval by High Net Worth ("HNW") Credit Risk. Collateral asset eligibility and loan value are established centrally with HNW Credit Risk. Loans are monitored daily leveraging enterprise securities based lending ("SBL") platforms with collateral pricing and revolving balances updated by overnight systemic batch process. Failure of a borrower to reduce, or repay, a loan or post additional acceptable collateral to resolve deficiencies within the agreed cure period are subject to liquidation or referral to BAC's Special Assets Group ("SAG").

MLBTC manages SBL credit risk based on the securities pledged as collateral and the risk profile of the borrower or counterparty. The overall credit risk assessment of SBL proposals, or modifications, include the evaluation of the liquidity, diversity and quality of the collateral to be pledged and of the borrower or counterparty. SBL credit exposures generally conform to established underwriting guidelines and are subject to approval based on defined credit approval standards.

Credit risk management include the following processes:

• • Credit origination: We assess borrowers' credit risk profiles through risk modeling, underwriting and asset analysis, while considering current and forward-looking views on economic and borrower outlooks to ensure legal entities remain within approved credit risk limits. SBL loans are underwritten in accordance with internal guidelines. The guidelines have been established to ensure that consideration is given to the individual characteristics of the collateral pledged, not simply to the loan coverage ratio and that credit decisions related to SBL activities are consistent with safe and sound credit practices.

• • Portfolio management: Once credit has been extended daily monitoring of credit risk exposure at both the individual borrower and portfolio levels is conducted to incorporate changes in collateral prices and positions as well as loan draws and repayments.

• • Loss mitigation activities: When loans are not compliant with terms due to collateral price fluctuations or collateral portfolio concentration thresholds borrowers are given two days to remediate or request an extension to the cure period. If counterparties are unable or otherwise do not remediate the deficiency steps will be taken to mitigate and manage losses, with teams and processes in place to appropriately manage credit events.

5.1 Table Credit quality of Assets

The Company's estimate of credit losses includes judgement about collectability based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions. While management has based its estimates on the best information available, future adjustments to the allowance for credit losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.

In general, loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans that are individually identified as being impaired, are classified as nonperforming unless well-secured and in the process of collection. Interest accrued but not collected is reversed when a loan is considered nonperforming and the loan is placed on non-accrual status. Interest collections on consumer loans for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received.

As part of its credit risk management, the Company may modify a loan agreement with a borrower experiencing financial difficulties through a refinancing or restructuring of the borrower's loan agreement (modification programs). The Company uses various indicators to identify borrowers in financial difficulty. Generally, consumer

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Bank of America Corporation published this content on 27 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 27 March 2024 18:07:44 UTC.