Risk Management Manual of Examination Policies
Section 17.1 - International Report Pages and Workpapers
|Policy and Procedures
- (a) Describe the net and aggregate position limits, maturity exposure limits, and any other limits placed on foreign exchange operations by the board of directors/trustees. (b) Do such limits appear reasonable?
(a) The bank’s Board of Directors has authorized trading only in these currencies listed in the position schedules. Overnight limits for each currency with the exception of the pound sterling are fixed at $250M; pound sterling limit is $1,500M. The aggregate position limit for all currencies is $2,000M. Maturity gaps are authorized only on major active currencies up to $100M not to exceed 3 months. Major active currencies have been described as having an active forward market. No general ledger account limits have been formulated.
(b) Limits appear to be reasonable.
- Describe the limits and guidelines established by the board of directors/trustees for dealing in foreign exchange with other banks and customers.
Individual customer limits are approved by the bank’s International Committee based on the customer’s creditworthiness and the volume of its foreign currency needs. The bank’s written internal credit policy pertaining to bank and nonbank customer foreign exchange lines is:
Excesses must be approved in writing by the account officer who approved the customer line. Maximum daily delivery risk limits per customer are set at 20% of the aggregate limits approved.
(a) 100% of foreign exchange line may mature within 180 days;
(b) 50% of the foreign exchange line may mature within 360 days;
(c) 20% of the foreign exchange line is available for contracts with maturities up to 18 months;
(d) no maturities may exceed 18 months.
- Fully describe any recent significant deviations by the bank from established limits and guidelines. Include in this description any significant deviations noted after completion of the Position Analysis, and the Maturity Distribution (GAP) Analysis.
No deviations from bank policy were noted in preparing the position analysis. Two exceptions to bank policy on GAP exposure were in evidence due to an inability to obtain forward cover. These exceptions were approved by the International Committee. No other recent deviations from policy were uncovered.
- (a) Describe the reports (i.e., position maturity, gap, revaluation, etc.) required by the directorate and senior management to ascertain compliance with directives. (b) Is the directorate or senior management notified when actions are taken which constitute deviation from policy? If "Yes", describe the approval procedures for such deviations from policy.
(a) Net position reports enumerating all foreign currency balance sheet items, future contracts, and after-hour and holdover transactions are transmitted to the designee of the International Committee on a daily basis. Reports are prepared by the foreign exchange bookkeeping department and reconciled to the trader’s blotter. Maturity gap reports are produced daily with the next month’s transaction reflected on a daily basis and subsequent transactions grouped in two-week intervals. Revaluation reports detailing ledger accounts, spot contracts, and forward contracts are developed on a weekly basis.
(b) Bank’s written policy provides for the immediate generation of exception reports where applicable limits are exceeded. Prior written approval of account officer is required for deviation from customer limits. Deviation from other limits is not permitted under any circumstances without prior approval of International Committee.
- If the bank is a subsidiary of a foreign bank, (a) what controls and guidelines has the parent imposed on the bank's foreign exchange activities? (b) Describe the foreign exchange reports prepared by the bank for the parent.
(a&b) The aforementioned guidelines and limits have been implemented at the direction of the parent bank. All reports of the bank’s audit department and the reporting mechanisms described in 4(a) are furnished to the parent bank for review.
- How frequently and by whom is the foreign exchange position revalued? Briefly describe the procedures used in the revaluation. If forward contracts are not revalued at future rates, so indicate.
Revaluation is performed on a bi-weekly basis by the International Operations section. Actual realized profit or loss is calculated by applying current spot rates to balance sheet accounts, as well as contracts of very near maturities. Unrealized profit or loss on future transactions is determined by utilizing the appropriate forward rates to the net position for each future period in the bank’s gap report.
- Describe the general ledger accounts affected by the periodic revaluation and the journal entries used to effect changes in these accounts. If any accounts are being used to capitalize losses or defer immediate recognition of profit, so indicate.
Actual realized profit or loss is charged to the profit and loss account with offsetting entries to the applicable local currency ledger accounts. With respect to future transactions, the bank charges “estimated profit(loss) on foreign exchange futures” account for the amount of the adjustment with an offset to the profit and loss account. Profits and losses are recognized at the date of revaluation.
- (a) Approximately what volume of the bank's foreign exchange dealings are with related companies or banks? (b) In what manner, if any, do the terms and conditions of such dealings vary from similar transactions with non-related companies and banks?
(a) During 2003, the bank entered into approximately $40,000M of forward contracts to purchase and sell foreign exchange with a related bank, First European Bank, London, England.
(b) Terms and conditions of contracts are substantially the same as transactions with non-related parties.
- Regarding holdover and/or after hour transactions, (a) describe the bank's system for controlling and recording such transactions and (b) indicate how management is informed of such transactions before recordation. (c) Does the system appear to be correctly designed and adequately controlled?
(a-b-c) The foreign exchange control group prepares a list of holdover items. Holdover items are incorporated into the daily position sheet, which together with the holdover list, is furnished to management on a daily basis. Holdover items are posted as of the dates contracted. The system is considered adequately controlled.