PIB A5.4 PIB A5.4 Foreign Exchange Risk Capital Requirement
PIB A5.4 Guidance
Authorised Firmwhich calculates its Foreign Exchange Risk Capital Requirementin accordance with PIB Rule 5.6.1(b) must apply the Rulesin this section.
Authorised Firmmust calculate its Foreign Exchange Risk Capital Requirementby using the standard method as follows:(a) calculating its net open position in each currency and in gold;(b) calculating its overall net open position in accordance with PIB Rule A5.4.4; and(c) multiplying the overall net open position by the percentage provided in PIB Rule A5.4.5.
Measuring the Net Open Position in a Single Currency
Authorised Firmmust calculate its net open position in each currency, and in gold, by summing:(a) the net spot position, being all asset items less all liability items, including accrued interest, denominated in the currency in question;(b) the net forward position, being all amounts to be received less all amounts to be paid under forward foreign exchange transactions, including currency futures and the principal on currency swaps not included in the spot position;(c) guarantees and similar instruments that are certain to be called and are likely to be irrecoverable;(d) net future income/expenses not yet accrued but al fully hedged, at the discretion of the Authorised Firm; and(e) any other item representing a profit or loss in Foreign Currencies.
Measuring the Overall Net Open Position
PIB A5.4.4(1) An
Authorised Firmmust convert the net position in each Foreign Currencyand in gold at spot rates into the reporting currency.(2) The overall net open position is measured by aggregating:(a) the sum of the net short positions or the sum of the net long positions, whichever is the greater; plus(b) the net position (short or long) in gold, regardless of sign.
PIB A5.4.5 PIB A5.4.5
Foreign Exchange Risk Capital Chargeis 8% of the overall net open position.
PIB A5.4.5 Guidance1. An example of how to calculate the overall net open position is as follows:
YEN EURO GB Saudi Riyal $ Gold +50 +100 +150 -20 -180 -35 TOTAL +300 TOTAL -200 TOTAL 352. The Foreign Exchange Risk Capital Chargewould be 8% of the higher of either the net long currency positions or the net short currency positions (i.e. 300) plus the net position in gold (35) = 335 x 8%=26.8.3. Forward currency and gold positions will normally be valued at current spot market exchange rates. Using forward exchange rates would be inappropriate since it would result in the measured positions reflecting to some extent current interest rate differentials. However, an Authorised Firmwhich bases its normal management accounting on net present values is expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring its forward currency and gold positions.
Treatment of Accrued Interest and Expenses, Forwards, and Structural Positions
PIB A5.4.6(1) An
Authorised Firmmust include interest accrued and accrued expenses as a position.(2) If an Authorised Firmincludes future income/expenses it must do so on a consistent basis and not include only those expected future flows that reduce its position.(3) An Authorised Firmmay exclude any positions which it has deliberately taken in order to hedge partially or totally against the adverse effect of the exchange rate on its Capital Resources, from the calculation of net open currency positions, if each of the following conditions is met:(a) the positions are of a structure that is of a non-dealing nature;(b) the Authorised Firmhas notified the DFSAin writing of its intention to rely upon this Rule; and(c) any exclusion of the position must be applied consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.(4) An Authorised Firmneed not include positions related to:(a) items which are deducted from its capital when calculating its Capital Resources, including investments in non-consolidated subsidiaries; or(b) other long-term participations denominated in Foreign Currencieswhich are reported in the published accounts at historic cost.