Foreign Exchange & International Operations Department Patrick El Hajj CFA Money Market Chief Dealer Role of the Central Bank 1-Currency issuance : the Central Bank prints and issues notes and coins for the government usually backed by holdings of government bonds ( Gold and Foreign currency in the case of Lebanon). 2-Banker to the banks : It provides a payments system for the transactions between banks and liquidity. 3-Banker to the government. 4-Banking supervision : The Central Bank regulates the banking system to seek to maintain financial stability . 5-Maintain financial stability (provides emergency liquidity assistance to financial institutions that might otherwise collapse, damaging the economy as a whole. Ex: LCB case). 6- Monetary policy function: increasing and decreasing the money supply by using 3 tools : Interest rate, open market operations and reserve requirement ratio. 7-Reserve Management: The Central Bank manages the portfolio of foreign exchange reserves of the country and may buy or sell them to influence the exchange rate ( Intervention ). One of the major roles of the central banks is to control inflation and stimulate growth. Central bankers should always keep in eye on major economic indicators such as inflation , growth , unemployment GDP , Trade balance etc…. Top Economic indicators 1. Gross domestic product (GDP) : it is the market value of all officially recognized final goods and services produced within a country in a given period of time . (Released 30 days after the quarter ends) 2. US Initial Jobless Claims SA : Weekly initial jobless claims are the actual number of people who have filed for unemployment benefits for the first time. (Released weekly) 3. Nonfarm payroll – Unemployment Indicator : A measure of the total number of persons employed in nonagricultural sectors of the economy. (Released 1st Friday of the month) 4. Consumer Price Index – CPI – Inflation Indicator It is a price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of the components are based on consumer spending patterns. (Released 15 days after the end of the month) 5.Producer Price Index- PPI- Inflation Indicator Measures prices received by producers at the first commercial sale. (Released 17 days after the end of the month) 6. Industrial Production Industrial production is the measure of physical output in factories, mines and utilities. Activity in manufacturing accounts for about 85% of total industrial production with the remainder of output from utilities and services. (Released 16 days after the end of the month) 7. Retail sales The report details the dollar value of purchases made at retail stores. (Example: Auto dealers, department stores, etc…). (Released 14 days after the end of the month) 8. Trade Balance Surplus and deficits in trade reflect the competitiveness of a nation’s economy, which in turn indicates demand for a country’s currency. It’s released about 40 days after the end of month . (Released 40 days after the end of month) 9. Purchasing Manager Index – PMI Is an economic indicator derived from monthly surveys of private sector companies. An index reading of 50.0 means that the variable is unchanged, a number over 50.0 indicates an improvement while anything below 50.0 suggests a decline. The further away from 50.0 the index is, the stronger the change over the month. (Released first business day after the end of month) 10. Open Market Committee decision The Federal OMC is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply. Economic Indicators - USA Economic Indicators - Euro zone Its very hard for a country to survive without financial assistance if it is borrowing at very high yields ( above 7 % ) Dealing Room Definition of Reserves Our main role in the Dealing room is to manage the USD 37 Billion foreign reserve of the Central Bank. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, the Japanese yen and other foreign currencies. Foreign Reserve Composition Net reserve (BDL ownership ) Deposits of Local Banks ( RR) -Liabilities Local banks covering their reserve requirement ( 15 %) . Deposits of international Banks -Liabilities Arab and International Banks and central banks placing time deposits with BDL. Other liabilities Local and international banks buy Certificate of Deposits issued by BDL. Time Deposit Each Day The department of Foreign Exchange and International Operations release new rates on time deposit based on the Libor for the USD and Euribor for the Euro . LIBOR stands for the London Inter-Bank Offered Rate ( the most popular benchmark ). Euribor stands for the EURO Inter-Bank Offered Rate. Borrowing cost : Rates paid for Local and Foreign banks BDL Foreign Reserve Currency Composition U.S. Dollar EURO Pound Sterling Japanese Yen Swiss Francs Other Arab Currencies International Reserve Assets Reserve Currency Allocation Gold Reserves According to Bloomberg data Lebanon is ranked 2nd in the MENA region after KSA and 15th globally 2012 MENA Gold Reserves (mil troy OZ) 0.15 0.399 0.41 0.709 0.83 2.431 10.382 Saudi Arabia 2.539 Lebanon Algeria Libya Kuwait Egypt Syria Morocco Jordan 4.624 Qatar Bahrain 5.583 9.222 Why do Countries Hold Reserves? Exchange rate targeting : Ex: Lebanon and Switzerland. The Central Bank of Lebanon has set a range for the LBP 1501-1514 . Whereas the Swiss National Bank has set a floor for the EUR/CHF at 1.20. They both intervene on regular basis to defend those prices. Exchange rate stability : Central banks could intervene to reduce the volatility in the FX market. €/$ ATR 100 to 200 points). Store of national wealth. Sovereign rating :The higher the FX reserve the better the sovereign rating of a country the lower the borrowing cost. Used to avoid financial crises : The Central Bank can use its reserve in time of crisis to pump liquidity into the market. Exchange rate Systems Fixed exchange rate systems determine a preset exchange rate and defend it . Advantage : Exchange rate stability. Disadvantage : Lost control of monetary policy . Economic shocks hit the real economy, rather than the exchange rate. Pegged exchange rate systems tie the exchange rate to another major currency, but allow it to float within a range. Advantage : good for trade, it gives confidence to investors. Disadvantage : Shocks hit the real economy. Exchange rate Systems Flexible exchange rate systems allow exchange rate to float freely according to supply and demand. Advantage : currency absorbs economic shocks, government retains control of monetary policy. Disadvantage : volatility adds risk to trade. 6 September 2011 : The SNB set a floor on the Eur /CHF at 1.20 CHF appreciation became a burden on the Swiss export industry. The Swiss National Bank intervened in the market selling CHF in order to weaken the threat posed by a strong Franc USD/LBP AT 1501-1514 SINCE 1999 USD/LBP Closing Prices Year DECEMBER 1980 3.6475 1981 4.6100 1982 3.8100 1983 5.4900 1984 8.8900 1985 18.10 1986 87.00 1987 455.00 1988 530.00 1989 505.00 1990 842.00 1991 879.00 1992 1838.00 1993 1711.00 1994 1647.00 1995 1596.00 1996 1552.00 1997 1527.00 1998 1508.00 1999 1507.50 2000/2012 1507.5 Where do we invest our fund ? A certain amount is kept in our accounts with our correspondents and the rest is managed on a daily basis. We invest our funds with investment grade banks (rated AA and above) and Central Banks. The investments are made for different time period going from one day up to 3 years depending on our liquidity needs. We buy treasury bills, notes and bonds. Our policy is to stay very liquid in order to be able to intervene in the FX market ( USD/LBP) supporting the Lebanese pound whenever need it. Eligible Assets BDL Investment : • Time deposits • Certificate of Deposits • Treasury Bills (less than 1 yr) • Treasury Notes ( 2 to 10 yrs) • Treasury Bonds (20 & 30 yrs) All our investments are made on Reuters dealing 3000 and Bloomberg , which are systems that links all the treasury desks around the world together. US SOVEREIGN SECURITIES European Sovereign Securities US Treasury Bill Description US Treasury Note Description Reuters Dealing and Bloomberg terminal Rogue traders If you put a rogue trader behind a Bloomberg terminal or Reuters dealing and leave it without supervision, you can be bankrupt in a matter of days A rogue trader is an authorized employee making unauthorized trades on behalf of their employer. The world’s biggest rogue traders in recent history Number 1: Jerome Kerviel Societe General Paris loss $ 7.2 billion In 2008 , SocGen's "rogue trader" Kerviel lost the French bank approximately $7.2 billion through arbitrage of equity derivatives from unauthorized trades. Number 2: Yasuo Hamanaka, Sumitomo corporation Tokyo -Loss $ 2.6 billion In 1996 Yasuo hamanaka who was once nick-named ” Mr. Copper” because of his aggressive trading style in the copper market, caused Sumitomo to lose $ 2.6 Billion from his unauthorized copper trades on the London Metal Exchange. As a result of his rogue trade, Mr. Copper was sentenced to eight years in prison in 1998. He was released in July 2005, a year before his sentence was supposed to end. Number 3 : Kweku Adoboli UBS London Loss $ 2.3 billion In September 2011, UBS revealed an unexpected $ 2.3 billion loss believed to be caused by a rogue trader in the banks London office. Kweku Adoboli,31 yrs old. Shortly after the massive trading loss was discovered, the Swiss Bank’s CEO Oswald Grubel resigned from his post.