Measuring currency exposureMeasuring currency exposure

Measuring currency exposure

1. For the purpose of calculating its TFC capital requirement, an ADI must include in its measurement of exposure to each currency the following:

2. the net spot position, i.e. all asset items less all liability items, including accrued interest and other accrued income and accrued expenses, denominated in the currency in question;

3. the net forward position, i.e. all amounts to be received less all amounts to be paid under forward foreign exchange transactions, including currency futures, the principal on currency swaps not included in the spot position, and interest rate transactions such as futures and swaps denominated in a foreign currency;

4. guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and

5. any other item representing a profit or loss in foreign currencies.

6. An ADI may also include in its measurement of currency exposure unearned but expected future interest and anticipated expenses if the amounts are certain and the ADI has hedged them. If an ADI includes future income/expenses, it must not select only expected future flows which reduce its position but must treat all on a consistent basis.

7. If an ADI has deliberately taken a position to either partially or totally hedge against the adverse effect of the exchange rate on its capital ratio, it may exclude the position from the measurement of exposure if:

8. the position is of a ‘structural’ (refer to paragraph 17 of this Attachment) or non-trading nature;

9. the ‘structural’ position does no more than protect the ADI’s capital adequacy ratio;

10. the position cannot be manipulated for speculative or profit-driven purposes; and

11. any exclusion of the position is applied consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.

12. A structural position includes:

13. any position arising from an instrument which qualifies as capital of the ADI under Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111); or

14. any position entered into in relation to the net investment in a self‑sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; or

15. investments in overseas subsidiaries or associates that are fully deducted from an institution’s capital for capital adequacy purposes under APS 111.