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  • CA-6.3 CA-6.3 Calculation of net open positions

    • CA-6.3.1

      A bank's exposure to foreign exchange risk in any currency is its net open position in that currency, which is calculated by summing the following items:

      (a) The net spot position in the currency (i.e. all asset items less all liability items, including accrued interest, other income and expenses, denominated in the currency in question, assets are included gross of provisions for bad and doubtful debts, except in cases where the provisions are maintained in the same currency as the underlying assets);
      (b) The net forward position in the currency (i.e. all amounts to be received less all amounts to be paid under forward foreign exchange contracts, in the concerned currency, including currency futures and the principal on currency swaps not included in the spot position);
      (c) Guarantees and similar off-balance-sheet contingent items that are certain to be called and are likely to be irrecoverable where the provisions, if any, are not maintained in the same currency;
      (d) Net future income/expenses not yet accrued but already fully hedged by forward foreign exchange contracts may be included provided that such anticipatory hedging is part of the bank's formal written policy and the items are included on a consistent basis;
      (e) Profits (i.e. the net value of income and expense accounts) held in the currency in question;
      (f) Specific provisions held in the currency in question where the underlying asset is in a different currency, net of assets held in the currency in question where a specific provision is held in a different currency; and
      (g) The net delta-based equivalent of the total book of foreign currency options (subject to a separately calculated capital charge for gamma and vega as described in Chapter CA-8, alternatively, options and their associated underlying positions are dealt with by one of the other methods described in Chapter CA-8).

      All assets and liabilities, as described above, should be included at closing mid-market spot exchange rates. Marked-to-market items should be included on the basis of the current market value of the positions. However, banks which base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.

      October 07

    • CA-6.3.2

      Net positions in composite currencies, such as the SDR, may either be broken down into the component currencies according to the quotas in force and included in the net open position calculations for the individual currencies, or treated as a separate currency. In any case, the mechanism for treating composite currencies should be consistently applied.

      October 07

    • CA-6.3.3

      For calculating the net open position in gold, the bank will first express the net position (spot plus forward) in terms of the standard unit of measurement (i.e. ounces or grams) and then convert it at the current spot rate into the base currency.

      October 07

    • CA-6.3.4

      Forward currency and gold positions should be valued at current spot market exchange rates. Using forward exchange rates is inappropriate as it will result in the measured positions reflecting current interest rate differentials, to some extent.

      October 07

    • CA-6.3.5

      Where gold is part of a forward contract (i.e. quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in Chapter CA-4 or Section CA-6.1 above, respectively.

      October 07

    • Structural positions

      • CA-6.3.6

        Positions of a structural, i.e. non-dealing, nature as set out below, may be excluded from the calculation of the net open currency positions:

        (a) Positions are taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the bank's capital adequacy ratio;
        (b) Positions related to items that are deducted from the bank's capital when calculating its capital base in accordance with the rules and guidelines in this Module, such as investments in non-consolidated subsidiaries; and
        (c) Retained profits held for payout to parent.

        The Central Bank will consider approving the exclusion of the above positions for the purpose of calculating the capital requirement, only if the following conditions are met:

        (i) The concerned bank provides adequate documentary evidence to the Central Bank which establishes the fact that the positions proposed to be excluded are, indeed, of a structural, i.e. non-dealing, nature and are merely intended to protect the bank's capital adequacy ratio. For this purpose, the Central Bank may ask for written representations from the bank's management or Directors; and
        (ii) Any exclusion of a position is consistently applied, with the treatment of the hedge remaining the same for the life of the associated assets or other items.
        October 07

    • Derivatives

      • CA-6.3.7

        A currency swap is treated as a combination of a long position in one currency and a short position in the second currency.

        October 07

      • CA-6.3.8

        There are a number of alternative approaches to the calculation of the foreign exchange risk in options. As stated in Section CA-6.1, with the Central Bank's prior written approval, a bank may choose to use internal models to measure the options risk. Extra capital charges will apply to those option risks that the bank's internal model does not capture. The standardised framework for the calculation of options risks and the resultant capital charges is described, in detail, in Chapter CA-8. Where, as explained in Paragraph CA-6.3.1, the option delta value is incorporated in the net open position, the capital charges for the other option risks are calculated separately.

        October 07