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  • CA-5.5 CA-5.5 Foreign Exchange Risk

    • Introduction

      • CA-5.5.1

        This section describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk.

        Apr 08

      • CA-5.5.2

        The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold and/or silver and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.

        Apr 08

      • CA-5.5.3

        A bank that holds net open positions (whether assets or liabilities) 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 bank's overall assets and liabilities. Where the bank is involved in option transactions, these must be agreed in advance with the CBB. The CBB will consider the appropriate treatment on a case by case basis.

        Apr 08

      • CA-5.5.4

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

        Apr 08

      • CA-5.5.5

        The open positions are calculated with reference to the bank's base currency, which will be either Bahraini Dinars (BD) or United States dollars (USD).

        Apr 08

      • CA-5.5.6

        In addition to foreign exchange risk, positions in foreign currencies may be subject to credit risk which should be treated separately. For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, will be treated as positions in US$.

        Apr 08

    • De Minimis Exemptions

      • CA-5.5.7

        A bank 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 and as evidenced by the CBB's prior written approval, be exempted from calculating the capital requirements on these positions. The CBB is likely to be guided by the following criteria in deciding to grant exemption to any bank:

        (a) The bank's holdings or taking of positions in foreign currencies, including gold and/or silver, defined as the greater of the sum of the gross asset positions and the sum of the gross liability position in all foreign positions and gold and/or silver, does not exceed 100% of its eligible capital; and
        (b) The bank's overall net open position, as defined in CA-5.5.15 does not exceed 2% of its eligible capital.
        Apr 08

      • CA-5.5.8

        The criteria listed above are only intended to be guidelines, and a bank will not automatically qualify for exemptions upon meeting them. Banks doing negligible foreign currency business, which do not take foreign exchange positions for the bank's own account, and wish to seek exemption from foreign exchange risk capital requirements, should submit an application to the CBB, in writing. The CBB will have the discretion to grant such exemptions. The CBB may also, at its discretion, fix a minimum capital requirement for a bank that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

        Apr 08

      • CA-5.5.9

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

        Apr 08

    • Calculation of Net Open Positions

      • CA-5.5.10

        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 assets items less all liability items, including accrued profit, 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);
        (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) Profits (i.e. the net value of income and expense accounts) held in the currency in question; and
        (e) 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.
        Apr 08

      • CA-5.5.11

        For calculating the net open position in gold and/or silver, the bank 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.

        Apr 08

      • CA-5.5.12

        Where gold and/or silver are part of a forward contract (i.e. quantity of gold and/or silver to be received or to be delivered), any foreign currency exposure from the other leg of the contract should be reported.

        Apr 08

    • Structural Positions

      • CA-5.5.13

        Positions of a structural nature (i.e. non-dealing), may be excluded from the calculation of the net open currency positions. These may include:

        (a) Positions taken deliberately in order to hedge, partially or totally, against the adverse effects of exchange rate movements on the bank's CAR;
        (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, where the profits are held in the currency concerned.
        Amended: October 2013
        Apr 08

      • CA-5.5.14

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

        (a) The concerned bank provides adequate documentary evidence to the CBB which establishes the fact that the positions proposed to be excluded are, indeed, of a structural nature (i.e. non-dealing) and are merely intended to protect the bank's CAR. For this purpose, the CBB may ask written representations from the bank's management or directors.
        (b) Any exclusion of a position is consistently applied, with the treatment of the structural positions remaining the same for the life of the associated assets or other items.
        Apr 08

    • Calculation of the Overall Net Open Position

      • CA-5.5.15

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

        (a) The sum of the net liabilities positions or the sum of the net asset positions whichever is greater
        (b) The net position (liabilities and assets) in gold and/or silver, regardless of sign.
        Apr 08

      • CA-5.5.16

        Where the bank is assessing its foreign exchange 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 bank. 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 should 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 bank should 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.

        Apr 08

    • Calculation of the Capital Charge

      • CA-5.5.17

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

        Apr 08

      • CA-5.5.18

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

        Example of the calculation of the foreign exchange overall net open position and the capital charge

        GBP DEM SAR US$ JPY GOLD and/or silver
        +200 +100 +70 -190 -40 -50
                   
        +370 -230 50

        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. 370) and of the net position in gold and/or silver (i.e. 50) = 420 @ 8% = 33.6

        Apr 08