Directive on the Monitoring of the Foreign Currency Exposures of Banks

CENTRAL BANK OF CYPRUS

BANKING SUPERVISION AND REGULATION DIVISION

DIRECTIVE ON THE MONITORING OF THE FOREIGN CURRENCY EXPOSURES OF BANKS

(Second edition)

DECEMBER 2005

CENTRAL BANK OF CYPRUS ______

DIRECTIVE ON THE MONITORING OF THE FOREIGN CURRENCY EXPOSURE OF BANKS

1. INTRODUCTION

The Central Bank of Cyprus by virtue of the powers vested in it under section 41 of the Banking Law of 1997, as subsequently amended, (hereinafter to be referred to as “the Law”), hereby, issues this Directive for the prudential monitoring of the risks arising from the foreign exchange operations and positions of banks.

This Directive applies to all banks incorporated in Cyprus and it has an immediate effect.

2. LIMITATIONS ON OPEN FOREIGN EXCHANGE POSITIONS

2.1 (a) Banks’ foreign currency placements with foreign banks, whether constituting working balances or hedging for foreign currency liabilities, should only be made with prime reputable banking institutions. (b) Except with the prior approval of the Central Bank of Cyprus, (i) the overall net foreign exchange position at the close of any business day (“overnight position”) shall not exceed 6% of the reporting bank’s capital base, whereas, the overall net foreign exchange position at any time during a business day (“intra-day position”) shall not exceed 8% of the reporting bank’s capital base (ii) Notwithstanding the provisions of (i) above, the net open overnight position in any one currency, with the exception of the Euro, may not exceed 3% of the reporting bank’s capital base, as calculated for the purposes of the capital adequacy return, while, the net open intra-day position in any one currency, with the exception of the Euro, may not exceed 5% of the reporting bank’s capital base. In Euro, both the net open overnight position and the net open intra-day position may not exceed 6% of the reporting bank’s capital base.

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The limits set above are only applicable to the reporting bank’s trading positions. Any foreign currency investments in subsidiary/associate/affiliate companies and in overseas branches as well as foreign currency long-term assets and liabilities shall not be included in the computation of the bank’s position vis-à-vis the limits set above, provided that the prior consent of the Central Bank of Cyprus has, to this effect, been obtained.

(c) Except with the prior approval of the Central Bank of Cyprus, the foreign exchange positions for banks, the main business of which is the carrying on of investments or acting as an agent for the preparation and placement of new issues of bonds and securities among investors and which, in general, offer a full range of financial services including long-term investments in the capital market and which, at the same time, do not engage in retail banking (ie granting personal, consumption, housing loans or engaging in the business of accepting deposits etc) to and from the general public, are as follows:

(i) The overall overnight net foreign exchange position may not exceed 30% of the reporting bank’s capital base, whereas, the overall intra-day net foreign exchange position may not exceed 40% of the reporting bank’s capital base. (ii) The net open overnight position in any one currency may not exceed 15% of the reporting bank’s capital base, as calculated for the purposes of the capital adequacy return, while the net open intra-day position in any one currency may not exceed 25% of the reporting bank’s capital base.

2.2 The net open position in each currency shall consist of the sum of the following elements (positive and negative): • the net spot position, i.e. all asset items before provision for bad and doubtful debts less all liability items, including accrued interest, in the currency in question. • the net forward position i.e. all amounts to be received less all amounts to be paid under forward exchange transactions, including currency futures and the principal on currency swaps not included in the spot position. • irrevocable guarantees that are certain to be called in.

2.3 The overall net foreign exchange position shall be calculated as follows:

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• the net long and the net short positions in each currency, calculated in accordance with 2.2 above, shall be summed separately to form a total of net long positions and a total of short positions respectively. The higher of these two totals is the bank’s overall net foreign exchange position.

2.4 Currency swap agreements should be treated as a combination of a long position in one currency and a short position in the second currency comprising the swap.

2.5 Any foreign exchange positions which a reporting bank has deliberately taken in order to hedge against an adverse effect of the exchange rates on its capital base may be excluded from the calculation of net open currency positions provided that the prior approval of the Central Bank of Cyprus has been granted. Such positions should be of a structural nature. The same treatment, subject to the same conditions as above, may be applied to positions which a bank has and which relate to items that are already deducted during the calculation of its capital base.

2.6 The terms capital base and consolidated capital base have the same meaning ascribed to them in the Directives issued by the Central Bank of Cyprus and which refer to the Computation of the Capital Base and the Capital Adequacy Ratio of banks.

2.7 The capital base to be applied, for the purposes of monitoring the limits set by this Directive, shall be based on the latest available six-monthly or annual audited accounts. The Central Bank of Cyprus may also take into account any significant changes in the bank’s capital base e.g. a new issue of share capital etc.

3. MANAGEMENT INFORMATION SYSTEMS

3.1 In addition to the above limits, reporting banks are obliged to establish and maintain adequate management information systems and appropriate internal control procedures and systems for the prompt identification, measurement and effective control of risks arising from the foreign exchange exposures undertaken. Such systems should also define the stop losses limits both on a daily and cumulative basis, which must be approved by the Central Bank of Cyprus.

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3.2 Reporting banks are, hereby, required to provide to the Banking Supervision and Regulation Division of the Central Bank of Cyprus with information about their existing policies, procedures and controls with regard to foreign currency exposures in order to assess their adequacy. In case the Central Bank of Cyprus is not satisfied about the adequacy and effectiveness of the reporting bank’s internal systems and procedures it reserves the right to revise downwards the limits set in terms of this Directive as well as the internal limits individually approved for each bank.

4. SUBMISSION OF RETURNS

4.1 By virtue of section 25(2) of the Law, all reporting banks are, hereby, required to submit on a monthly basis analytical information on their net open foreign currency position on the attached return.

4.2 The return shall reflect the position on the last business day of each month and should be submitted to the Supervision of International Banks, Regulation and Financial Stability Department of the Central Bank of Cyprus the latest within fifteen days from the end of each month.

4.3 Any reporting bank which is/will be a holding company of other banking companies or which has/will establish overseas branches will also be required to submit a separate return for each such subsidiary or branch as well as its consolidated position.

4.4 Instructions and explanations for completing the monthly return on the foreign exchange positions appear on the attached Appendix.

5. Cancellation of Directives

5.1 Circular letter No. OBU/3 dated 10 April, 1986 on the Foreign Currency Exposures has already been cancelled by the initial edition of this Directive, dated 2 November, 2001. 5.2 The initial Directive issued to banks on the Monitoring of Foreign Currency Exposures dated 2 November, 2001 is, hereby, cancelled.

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APPENDIX

EXPLANATIONS AND INSTRUCTIONS TO BANKS FOR COMPLETING THE MONTHLY RETURN OF THE FOREIGN CURRENCY POSITIONS

1. The purpose of the return is the monitoring of compliance with the limits set in the Directive on the Monitoring of the Foreign Currency Exposures of banks. 2. The return shall be compiled in accordance with the provisions and instructions of the existing Directive issued to banks on the layout and contents of the monthly Balance Sheet and Analytical Profit and Loss Account returns as well as the additional explanations and instructions described below:

(a) All transactions in foreign currencies should be recorded in the reporting banks’ books on a transaction date basis as opposed to value-date basis.

(b) All amounts reported in the Return should be in the foreign currency concerned except for the net open position which should be converted and shown in US Dollars. Banks which have been authorised by the Central Bank of Cyprus to report, for the purposes of this return, in the currency of Euro should show their net open position in this currency. The conversion into US Dollars/Euro, as the case may be, should be made by using the official mid-exchange rate against US Dollar/Euro on the reporting date.

(c) The net open position should be analysed separately in each currency. Currencies in which the net open position does not exceed the equivalent of US$200 thousand may be summed and reported together as “Other currencies”. In this connection, long positions and short positions should not be counterbalanced but summed separately.

3. The net spot position should include all asset and liability items (excluding forward positions) including accrued interest and irrevocable guarantees that are certain to be called in. 4. The return should be signed by two officials duly authorised for this purpose. 5. In case of any doubt as to the treatment of any item or account or where any clarification is required, reporting banks may refer to the Supervision of International Banks, Regulation and Financial Stability Department of the Central Bank of Cyprus for an explanation, guidance or ruling.

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RETURN ON THE FOREIGN CURRENCY EXPOSURES

For the month ended on …………….…..

Reporting bank …………………………………………………………..

Notes 1. The return on foreign currency exposures is prepared in accordance with the relevant Directive and Instructions for the Completion of the Foreign Currency Exposures Return issued by the Central Bank of Cyprus.

2. This return is completed monthly, on the last business day of each month, in accordance with the relevant Directive and instructions.

3. This return is submitted within fifteen days from the end of the reporting date to:

Supervision of International Banks, Regulation and Financial Stability Department, Central Bank of Cyprus 80, Kennedy Avenue P.O. Box 25529 1395 Nicosia

Telephone No.: 22 - 714400 Facsimile No.: 22 - 378049

In the event of a query, the Central Bank of Cyprus may contact the following official of our bank: ………………………………………………….. (name) ………………………………………………….. (position)

Telephone. No.: ………………………

Facsimile No.: ………………………

E-mail address: ………………………

6 CENTRAL BANK OF CYPRUS FORM IB4 BANKING SUPERVISION AND REGULATION DIVISION SUPERVISION OF INTERNATIONAL BANKS, REGULATION AND FINANCIAL STABILITY DEPARTMENT

REPORTING BANK ……………………………………………………………….. (*)

ASSESSMENT OF THE OVERNIGHT FOREIGN CURRENCY EXPOSURE AS AT …………..…………

US$ 000/ % to capital Euro ** base

A. Capital base …...………

B. Overall net foreign exchange position …...……… …...………

C. Net open foreign currency position:

GBP …...……… …...……… EURO …...……… …...……… JPY …...……… …...……… AUD …...……… …...……… CHF …...……… …...……… CAD …...……… …...……… ………….. …...……… …...……… ………….. …...……… …...……… OTHER …...……… …...………

………………………. …………………….. (Authorised Signatures)

(*) To be completed only by Cyprus incorporated banks (**) Delete as appropriate Notes: 1. Capital base to be applied shall be that shown on the reporting bank's latest "Capital Adequacy Return" submitted to the Central Bank of Cyprus.

2. The figures "Overall net foreign currency position" and "Net open foreign currency position" shall be taken from the return on "Foreign Currency Positions" [Form IB4(a)]. CENTRAL BANK OF CYPRUS FORM IB4(a) BANKING SUPERVISION AND REGULATION DIVISION SUPERVISION OF INTERNATIONAL BANKS, REGULATION AND FINANCIAL STABILITY DEPARTMENT PRIVATE AND CONFIDENTIAL REPORTING BANK ………………………………………………………………..

RETURN ON THE FOREIGN CURRENCY POSITIONS AS AT ………………………………

Spot Position Forward Position Net Open Foreing Currency Position Currency Assets Liabilities Assets Liabilities In foreign currency In US Dollars/Euro * 000 000 000 000 000 000

GBP ……………… ……………… ……………… ……………… ……………… ……………… EURO ……………… ……………… ……………… ……………… ……………… ……………… JPY ……………… ……………… ……………… ……………… ……………… ……………… AUD ……………… ……………… ……………… ……………… ……………… ……………… CHF ……………… ……………… ……………… ……………… ……………… ……………… CAD ……………… ……………… ……………… ……………… ……………… ……………… …………. ……………… ……………… ……………… ……………… ……………… ……………… …………. ……………… ……………… ……………… ……………… ……………… ……………… OTHER ** ……………… ……………… ……………… ……………… ……………… ………………

Total of net short positions ……………… Total of net long positions ……………… MANAGER ACCOUNTANT Overall net foreign exchange position ……………… …………………….. …………………….. (Authorised Signatures) * Delete as appropriate ** Currencies in which the net position does not exceed the equivalent of US$200 thousand, may be added and reported together (in US Dollars), provided that the net long positions are added separately from the net short positions so that they are not counterbalanced.