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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 Islamic bank licensee's foreign exchange risk, and the capital required against that risk. An Islamic 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.

        January 2015

      • 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 silver using the closing mid-market spot rate and as a second step, the measurement of the risks inherent in the bank's mix of assets and liabilities positions in different currencies.

        January 2015

      • CA-5.5.3

        An Islamic bank licensee 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 Islamic bank licensee's overall assets and liabilities.

        January 2015

      • CA-5.5.4

        The open positions and the capital requirements are calculated at the closing mid-market spot rate with reference to the entire business (i.e. the banking and trading books).

        January 2015

      • CA-5.5.5

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

        January 2015

      • CA-5.5.6

        In addition to foreign exchange risk, positions in foreign currencies may be subject to counterparty credit risk which must be treated separately as shown in Appendix CA-2. For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, is treated as positions in US$.

        January 2015

    • De Minimis Exemptions

      • CA-5.5.7

        An Islamic 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 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 Islamic bank licensee:

        (a) The Islamic bank licensee'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 Total Capital as defined in CA-1.1.2 and subject to any limits described in section CA-2.2; and
        (b) The Islamic bank licensee's overall net open position, as defined in Paragraph CA-5.5.15 does not exceed 2% of its Total Capital described in Subparagraph CA-5.5.7(a).
        January 2015

      • 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. Islamic bank licensees doing negligible foreign currency business, which do not take foreign exchange positions for the Islamic bank licensee'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 an Islamic bank licensee that is exempted from calculating its foreign exchange risk capital requirement, to cover the risks inherent in its foreign currency business.

        January 2015

      • CA-5.5.9

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

        January 2015

    • Calculation of the Net Open Position in a Single Currency

      • CA-5.5.10

        An Islamic 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 concerned 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 position of a binding unilateral promise by the Islamic bank licensee to buy and/or sell the concerned currency on a specified future date (that are not included in the spot open 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) 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.
        January 2015

      • CA-5.5.11

        For calculating the net open position in gold or silver, the Islamic 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 reporting or base currency.

        January 2015

      • CA-5.5.12

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

        January 2015

    • Structural Positions

      • CA-5.5.13

        Positions of a structural nature (i.e. non-trading), 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 Islamic bank licensee's CAR;
        (b) Positions related to items that are deducted from the Islamic bank licensee's regulatory capital when calculating its Total Capital in accordance with the rules and guidelines in this Module, such as investments in non-consolidated subsidiaries or long-term participations denominated in foreign currencies which are reported at historical cost; and
        (c) Retained profits held for payout to parent, where the profits are held in the currency concerned.
        January 2015

      • 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 Islamic 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 nature (i.e. non-dealing) and are merely intended to protect the Islamic bank licensee's CAR. For this purpose, the CBB may ask written representations from the Islamic bank licensee's management or directors; and
        (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.
        January 2015

    • 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; and
        (b) The net position (liabilities and assets) in gold and/or silver, regardless of sign.
        January 2015

      • CA-5.5.16

        Where the parent 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 concerned 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 Islamic bank licensee 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.

        January 2015

    • Calculation of the Capital Charge

      • CA-5.5.17

        The capital charge is 8% of the overall net open foreign currency position as calculated in Paragraph CA-5.5.15.

        January 2015

      • 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 EUR SAR US$ JPY GOLD and 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

        January 2015