PRESENTATION ON

FOREIGN EXCHANGE RISKS AND MITIGATION IN BANK

Presented by

FAHIM AHMED

Senior Manager, Treasury Operations

Banking Services

April 10, 2011

CONTENTS OF THE PRESENTATIONS

• RISK OVERVIEW IN BANK

• BANGLADESH BANK FX RISK MANGEMENT POLICY

• TREASURY RISK MANGEMENT POLICY OF BBL

• KEY RISKS OF TREASURY AND SOME DEFINATIONS

• TREASURY OVERVIEW AND FX RELATED FUNCTIONS

• TRESURY OPERATIONS OVERVIEW AND FUNCTIONS

RISK OVERVIEW IN BANK • “IF YOU WAIT FOR THE

WAVES TO SUBSIDE YOU MAY NEVER GO OUT TO THE SEA….

• BUT MAKE SURE YOU KNOW HOW TO SWIM”

If we want to see the correct Operation system of the Bank for managing its potential RISK, we have to ensure following three ‘P’s are in placed the Bank

Policy: Guidelines that govern the management of risk People: Organization Structure that supports the policy Process: Its ensures controls/checks are in place to mange the risk and ensure accountability

What are the Risks in

Banking?

Core Risks: - Credit

- Asset and Liability or Balance Sheet

- Foreign Exchange

- Internal Control and Compliance (with Regulatory Guidelines/Laws/Policies)

- Money Laundering

Support Function Risks:

- Human Resource

- Capital and Revenue Expenditure

- Accounting Standards

- Security

- Information Technology

- Corporate Affairs –(Brand, Internal/External Communications)

FOREIGN EXCHANGE RISK MANAGEMENT

Policy Guidelines:

Dealing Limits

Mandatory Leave

Position Reconciliation

Nostro Reconciliation

After Hours/Off Premises Dealing

Stop Loss Limits

Mark to Market Valuation

Internal Audit

Organization Structure:

Centralized Money Market

Separate Trading and Risk Management Units

Back-Office/Front Office Separation

Process Guidelines

Dealing Room

Deal Recording/Taping/Delay

Counter party Limits

Rate/Deal Appropriateness

Stop Loss Orders

Deals Outstanding/Treasury Risk Report

Code of Conduct

TREASURY RISK MANAGEMENT POLICY OF BBL

Separate reporting line for Treasury and Treasury Operations.

Documented Job Descriptions of Each Function.

Centralized Money Market and Foreign Exchange

Activities in Treasury.

Dedicated module for Treasury product processing, daily reconciliation.

Dealing Limits, Stop loss limits, Over night limits, Intra day Limits, Off premises limit, After hours limit, Counterparty limit maintenance.

Daily reporting to MANCOM members for effective Compliance and Monitoring.

KEY RISKS OF TREASURY

Credit Risk

Pre-Settelement/Settlement Risk

Forward Risk

Market Risk Interest Rate Risk

Liquidity Risk

Price Risk

Operational Risk

Compliance Risk

Strategic Risk

Reputation Risk

DEFINITIONS OF FX SOME KEY RISKS

MARKET RISK: The uncertain impact on a bank’s earning resulting from changes in market conditions. It may happened due to following reasons:

• Price volatility

• Interest rate fluctuations

• Foreign exchange fluctuations

• Market liquidity

LIQUIDITY RISK: The current or prospective risk to earnings and capital, arising from a banks inability to meet its liabilities when they become due, without incurring unacceptable losses due to over-liquidity relative to its liabilities

INTEREST RATE RISK (IRR): is the risk that bank’s earnings and/or net worth will be influenced adversely by unanticipated changes in interest rate structure

FEED BACK TIME

LETS HAVE A RECAP …..

TREASURY BUSINESS ACTIVITY • MONEY MARKET :

• Facilitates in lending & borrowing of money for Call and short term

• The transactions cover overnight deals to deals that mature in twelve months time

• To meet up CRR & SLR requirement and banks inflow and outflow

• FOREIGN EXCHANGE MARKET:

• Buying & Selling of Foreign Currencies on value date

• Buy low and sell high of Foreign currency to counterparty

• Exchange gain by compiling regulator’s, internal and external guideline

• CAPITAL MARKET:

• To maximize the Shareholder’s value in the long run

• Ensure sound return on investment

• Trading shares and securities in Stock Exchange Market.

Price

OVERSOLD FX Loss FX Profit

OVERBOUGHT FX Profit FX Loss

n Net FX position to take advantage of price changes

to generate trading income

n Exposed to adverse FX price movements

FX Gapping

TREASURY BUSINESS ACTIVITY -FOREX

TREASURY BUSINESS ACTIVITY- FOREX 1. Circulation of Exchange rate & Interest rate on Fx. deposits i. Rates are generated based on: a. Inter Bank exchange rate, Reuters, Bloomberg b. Rates offered by other banks

2. Maintenance of Exchange Position within the limit: i. If position gets flooded/shortage, it is required to sale or buy of Fx.

Stock ii. If foreign exchange holding in Bangladesh Bank gets lower than

the half of Bank’s open position then, it is required to buy foreign currency.

Key Foreign Exchange products for Treasury: • SPOT Corporate • FORWARDS Merchant Cover • SWAPS OBU

TREASURY BUSINESS ACTIVITY -FOREX 3. NOSTRO funding / BB FC clearing A/C. I. Monitors fund position, if it does not meet branch requirement

for LC payment, outward remittance etc. then check for inward remittance to match the necessity. If there is not sufficient inward remittance to meet all the demand then it is required to buy foreign exchange and route the fund to its required NOSTRO account

4. Meeting Trade/Customer requirements: I. If there is any payment requirement against LC issued by the

Branches/Corporate/SME fund has to be arranged in the required position

ii. In the case of outward remittance sufficient fund has to be

arranged in specified NOSTRO account by buying or receiving inward remittance.

TREASURY OPERATIONS OVERVIEW Mid Office – Monitoring Risk of Treasury’s activity

Regulatory Limits-

50% holding of FC balance with BB against Bank’s total FC assets

5.5% Daily and 6% bi-weekly (15 days) CRR maintenance

19% SLR maintenance

30% paid up capital of investee or investors bank’s reserve

Overnight FC open position maintenance and squaring of deals

Daily Nostro reconciliation and route unmatched items

Internal Limits-

Counter party Credit Limit

Dealer’s Limit and delegation of authority by Head of Treasury

Nostro Fund movement from FC to FC and FC to Counter party’s FC

Stop loss and setting Trigger limit, Management reporting

WAR and VAR calculation

TREASURY OPERATIONS OVERVIEW

Back Office – Processing

MM & CM Deals:

Call Money deals with Banks/ NBFI and exchanging CMR

Term deals with Banks/ NBFI and Term instruments

Processing and submitting bid forms of T-Bills/ Bonds, Repo & Reverse Repo

Booking Bonds, Shares and Debentures receivable and payable

Processing all transactions

FX Deals:

Inter-Bank FX deals slip processing

Regulatory report preparations

SWIFT Payment execution and confirming payments

Record keeping of cancelled deal slips and proper documentations

TREASURY OPERATIONS OVERVIEW Treasury Back Office Support – Processing

MM Deals:

Issue BB Cheque as per order from Back Office

Collect and deliver BB cheque, FDD and other settlement through BB A/cs

Collect BB A/c statement and Ensure Opening/Closing balance

Ensure interdepartmental relationship with BB Officials.

Ensure timely delivery of confirmation of FX and Money Market related activity.

Corporate Challan settlement

BB related news and circular collections