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  • CA-11 CA-11 Market Risk — Foreign Exchange Risk — (STA)

    • CA-11.1 CA-11.1 Introduction

      • CA-11.1.1

        A conventional bank licensee which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the conventional bank licensee's overall assets and liabilities.

        January 2015

      • CA-11.1.2

        This Chapter describes the standardised method for calculation of the conventional bank licensee's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold48 and, as a second step, the measurement of the risks inherent in the conventional bank licensee's mix of long and short positions in different currencies.

        48 Positions in gold must be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in similar manner to foreign currencies.

        January 2015

      • CA-11.1.3

        The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

        January 2015

      • CA-11.1.4

        The open positions are calculated with reference to the conventional bank licensee's base currency, which will be either BD or US$.

        January 2015

      • CA-11.1.5

        Conventional bank licensees which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, must obtain the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in chapter CA-14. Conventional bank licensees which do not use internal models must follow the standardised approach, as set out in detail in this Chapter.

        January 2015

      • CA-11.1.6

        In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which must be treated separately.

        January 2015

      • CA-11.1.7

        For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, are treated as positions in US$.

        January 2015

    • CA-11.2 CA-11.2 De Minimis Exemptions

      • CA-11.2.1

        A conventional bank licensee doing negligible business in foreign currencies and which does not take foreign exchange positions for its own account may, at the discretion of the CBB evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions.

        January 2015

      • CA-11.2.1A

        The CBB is likely to be guided by the following criteria in deciding to grant exemption to any conventional bank licensee under Paragraph CA-11.2.1:

        (a) The conventional bank licensee's holdings or taking of positions in foreign currencies, including gold, defined as the greater of the sum of the gross long positions and the sum of the gross short positions in all foreign currencies and gold, does not exceed 100% of its Total Capital; and
        (b) The conventional bank licensee's overall net open position, as defined in Paragraph CA-11.3.1, does not exceed 2% of its Total Capital as defined in Chapter CA-2.
        January 2015

      • CA-11.2.2

        The criteria listed in Paragraph CA-11.2.1A are only intended to be guidelines, and a conventional bank licensee will not automatically qualify for exemptions upon meeting them. The CBB may also, in its discretion, fix a minimum capital requirement for a conventional bank licensee which is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

        January 2015

      • CA-11.2.3

        The CBB may, at a future date, revoke an exemption previously granted to a conventional bank licensee, if the CBB is convinced that the conditions on which the exemption was granted no longer exist.

        January 2015

    • CA-11.3 CA-11.3 Calculation of Net Open Positions

      • CA-11.3.1

        A conventional bank licensee'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 conventional bank licensee'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-13, alternatively, options and their associated underlying positions are dealt with by one of the other methods described in Chapter CA-13).
        January 2015

      • CA-11.3.2

        All assets and liabilities, as described in Paragraph CA-11.3.1, must be included at closing mid-market spot exchange rates. Marked-to-market items must be included on the basis of the current market value of the positions. However, conventional bank licensees which base their normal management accounting on net present values must 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.

        January 2015

      • CA-11.3.3

        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 must be consistently applied.

        January 2015

      • CA-11.3.4

        For calculating the net open position in gold, the conventional bank licensee must 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.

        January 2015

      • CA-11.3.5

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

        January 2015

      • CA-11.3.6

        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 must be reported as set out in Chapter CA-9 or Section CA-11.1, respectively.

        January 2015

      • Structural Positions

        • CA-11.3.7

          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 conventional bank licensee's CAR;
          (b) Positions related to items that are deducted from the conventional bank licensee'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.
          January 2015

        • CA-11.3.7A

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

          (a) The conventional bank licensee provides adequate documentary evidence to the CBB 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 conventional bank licensee's CAR. For this purpose, the CBB may ask for written representations from the conventional bank licensee's management or directors; and
          (b) 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.
          January 2015

      • Derivatives

        • CA-11.3.8

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

          January 2015

        • CA-11.3.9

          There are a number of alternative approaches to the calculation of the foreign exchange risk in options. As stated in Section CA-11.1, with the CBB's prior written approval, a conventional bank licensee may choose to use internal models to measure the options risk. Extra capital charges will apply to those option risks that the conventional bank licensee'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-13. Where, as explained in Paragraph CA-11.3.1, the option delta value is incorporated in the net open position, the capital charges for the other option risks are calculated separately.

          January 2015

    • CA-11.4 CA-11.4 Calculation of the Overall Net Open Positions

      • CA-11.4.1

        The net long or short position in each currency is converted, at the spot rate, into the reporting currency. The overall net open position is measured by aggregating the following:

        (a) The sum of the net short positions or the sum of the net long positions, whichever is greater; plus
        (b) The net position (short or long) in gold, regardless of sign.
        January 2015

      • CA-11.4.2

        Where the conventional bank licensee is assessing its foreign exchange risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the conventional bank licensee. In such cases, the internal limit for that branch/subsidiary, in each currency, may be used as a proxy for the positions. The branch/subsidiary limits must be added, without regard to sign, to the net open position in each currency involved. When this simplified approach to the treatment of currencies with marginal operations is adopted, the conventional bank licensee must adequately monitor the actual positions of the branch/subsidiary against the limits, and revise the limits, if necessary, based on the results of the ex-post monitoring.

        January 2015

    • CA-11.5 CA-11.5 Calculation of the Capital Charge

      • CA-11.5.1

        The capital charge is 8% of the overall net open position.

        January 2015

      • CA-11.5.2

        The table below illustrates the calculation of the overall net open position and the capital charge:

        January 2015

      • Example of the Calculation of the Foreign Exchange Overall Net Open Position and the Capital Charge

        • CA-11.5.3

          GBP EURO CA$ US$ JPY Gold
          +100 +150 +50 -180 -20 -20
          +300 -200 20
          The capital charge is 8% of the higher of either the sum of the net long currency positions or the sum of the net short positions (i.e. 300) and of the net position in gold (i.e. 20) = 320 x 8% = 25.6
          January 2015