MARKET OPERATIONS DEPARTMENT

FINANCIAL STABILITY DEPARTMENT

ADMINISTRATION DEPARTMENT

MONETARY POLICY DEPARTMENT

Rules for the Riksbank’s financial asset management 15 MAY 2007

2005-1026-MOP

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CONTENTS I. INTRODUCTION........................................................................................................4

1. Adoption and coming into force ............................................................................... 4 2. Aim .......................................................................................................................... 4 3. Application ............................................................................................................... 4 4. Decisions regarding these rules................................................................................. 5 5. Organisation and responsibility................................................................................. 5 6. Documentation of decisions ..................................................................................... 7 7. Formulation and communication of rules.................................................................. 7

II. STARTING POINTS FOR THE ASSET MANAGEMENT ................................................9 1. The Riksbank’s tasks................................................................................................. 9 2. Objectives ................................................................................................................ 9 3. General information about risk level ......................................................................... 9 4. Basic conditions ........................................................................................................ 9 5. Execution of the asset management ....................................................................... 10

III. LIQUIDITY RISK .......................................................................................................11 1. General................................................................................................................... 11 2. Aim ........................................................................................................................ 11 3. Risk management................................................................................................... 11

IV. MARKET RISK AND CREDIT RISK.............................................................................12 1. Aim ........................................................................................................................ 12 2. Measurement of risk............................................................................................... 12 3. Risk management................................................................................................... 13

V. OPERATIONAL RISK ................................................................................................14 1. Aim ........................................................................................................................ 14 2. Measurement of risk............................................................................................... 14 3. Risk management................................................................................................... 14

VI. LEGAL RISK ..............................................................................................................15 1. Aim ........................................................................................................................ 15 2. Risk management................................................................................................... 15

VII. EVALUATION AND REPORTING..............................................................................16 1. Aim ........................................................................................................................ 16 2. Scope and frequency .............................................................................................. 16

APPENDICES ......................................................................................................................17 A. INVESTMENT RULES ................................................................................................17

1. General................................................................................................................... 17 2. Permitted issuers and instrument types................................................................... 17 3. Counterparties with which financial transactions may be performed ...................... 19

B. LIMITS......................................................................................................................21 1. Strategic limits ........................................................................................................ 21 2. Other strategic decisions ........................................................................................ 21 3. Exposure limits for countries ................................................................................... 21 4. Concentration limits for countries ........................................................................... 22 5. Exposure limits for issuers ....................................................................................... 22 6. Concentration limits for issuers ............................................................................... 22 7. Exposure limits for counterparties ........................................................................... 22

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8. Concentration limits for counterparties................................................................... 22 9. Aggregation of limits .............................................................................................. 23 10. Change of limits due to downgraded credit rating.................................................. 23

C. SPECIAL REQUIREMENTS FOR INTERMEDIARIES ...................................................24 1. Definition ............................................................................................................... 24 2. Agreement regulation............................................................................................. 24 3. Limits...................................................................................................................... 24

D. PRINCIPLES FOR ESTABLISHING THE STRATEGIC BENCHMARK PORTFOLIO .......25 1. General................................................................................................................... 25

E. APPLICATION PROCEDURE FOR DECISIONS THAT ENTAIL CHANGES IN THE ASSET MANAGEMENT..................................................................................................................27

1. General................................................................................................................... 27

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I. INTRODUCTION

1. Adoption and coming into force

1.1. These rules were adopted by the Executive Board of Sveriges Riksbank on 10 May 2007. The rules entered into force on 15 May 2007.

Earlier versions of the rules:

25 August 2006; entered into force on 1 September 2006

23 March 2006; entered into force on 24 March 2006.

12 January 2006; entered into force the same day.

8 December 2005; entered into force on 1 January 2006, at which time the Rules for the management of the gold and foreign exchange reserve (Regler för förvaltningen av guld- och valutareserven) ceased to apply.

2. Aim

2.1. The aim of this document is to lay down rules for the management of the financial assets that the Riksbank, in accordance with Chapters 6 and 7 of the Sveriges Riksbank Act (1988:1385), manages in its pursuance of monetary and exchange rate policy. The rules also apply to the intraday credit provided by the Riksbank with a view to promoting a safe and efficient payment system.

3. Application

3.1. The rules are, to the extent that exceptions are not specified below, applicable to the following assets and instruments held by the Riksbank:

A. assets within the framework of the Riksbank’s gold and foreign exchange reserve management,

B. assets within the scope of the system of Special Drawing Rights (SDR),

C. shares in the Bank for International Settlements (BIS) and S.W.I.F.T SCRL,

D. lending implemented in the pursuance of monetary policy in accordance with the Rules and Regulations for RIX and monetary policy instruments (the RIX rules and regulations),

E. repos (repurchase agreements) implemented in the pursuance of monetary policy in accordance with the RIX rules and regulations,

F. the purchase and sale of securities in the pursuance of monetary policy in accordance with the RIX rules and regulations,

G. intraday lending with a view to promoting the functioning of the payment system in accordance with the RIX rules and regulations,

H. currency transactions implemented in order to intervene in the foreign exchange market,

I. foreign exchange swaps implemented in accordance with the RIX rules and regulations,

J. foreign exchange market transactions due to the execution of payments for the Swedish Government or for the Riksbank in addition to those transactions resulting from the activities in A, B, H or I,

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K. other currency transactions than those regarding the activities in A, B, H, I or J that are

deemed necessary for the performance of the Riksbank’s tasks.

3.2. The rules are not applicable to

L. credit provided with the aim of supporting liquidity in accordance with the Sveriges Riksbank Act

4. Decisions regarding these rules

4.1. The Executive Board shall make all decisions with regard to these rules.

4.2. If a payment concerning the activity in I must be carried out speedily, the Head of the Market Operations Department shall have the right to decide to execute such a payment even if this should mean that limits according to Appendix B, section 1.1, points (iv) and (v) are exceeded. However, in such a case the limits may only be exceeded for a maximum of two days.

5. Organisation and responsibility

Governing documents, etc. 5.1. For some activities other regulations may be applicable, such as the RIX rules and

regulations, the Riksbank’s instructions for collateral management and Rules for accounting and annual accounts at Sveriges Riksbank (Regler för bokföring och årsredovisning i Sveriges riksbank) as well as implementation instructions for these. The Riksbank may also be party to international agreements that restrict the Bank’s room for manoeuvre in its asset management.1 The Riksbank’s room for manoeuvre may also be restricted by sanctions or similar measures decided by the United Nations or the European Union.

Organisation 5.2. Within the Riksbank’s organisation the following functions are primarily2 affected by the

management of the financial assets:

(i) The Executive Board (ii) The Market Operations Department (MOP) – both the implementation of

management and other transactions and the following up and administration of the management and transactions, as well as the management of collateral pledged to the Riksbank by the Riksbank’s counterparties

(iii) The Monetary Policy Department (APP) – the implementation of monetary policy and foreign exchange policy and the execution of currency exchanges and other foreign exchange transactions made with, or arising from payment orders from, Swedish government authorities and international organisations or given international agreements (operations D-J)

(iv) Administration Department (ADM) – reporting of financial assets and liabilities. (v) Financial Stability Department (AFS) – risk control (vi) The group for the management of the Riksbank’s financial assets (the Asset Group) –

drafting of Executive Board matters and follow-up, but not decisions

1 For example, due to the 2004 Central Bank Gold Agreement. 2 Some support functions fall outside this list.

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5.2.1 The Market Operations Department shall contain a function that is responsible for

following up results (including calculation of results) and day-to-day risk management. This function shall be independent of the functions responsible for day-to-day asset management. The head of this function will report to the Head of the Market Operations Department. In addition, the head of this function will report to the Head of Risk Control any circumstances that are significant for controlling financial risks in the bank's financial asset management.

5.2.2 The Financial Stability Department shall contain a risk control function that is independent of the Market Operations Department and other departments concerned. The Head of Risk Control reports to the Head of the Financial Stability Department. The Head of Risk Control can refer matters significant to the management and control of financial risks within the area of financial asset management directly to the Executive Board for a decision. The Head of Risk Control shall present a report to the Governor and the Executive Board of the Riksbank.

Division of responsibilities 5.3. The responsibilities of the different functions are regulated by the Instructions for Sveriges

Riksbank and the appendix to these. Within the scope provided by these instructions and on the basis of the provisions in these rules this implies, more specifically, the following for the management of (trade with) the financial assets:

5.3.1 The Head of MOP shall annually submit to the Deputy Governor responsible for proposals regarding financial asset management a proposal for an Executive Board decision on strategic limits and other strategic issues for the financial asset management on the basis of the bounds specified in Appendix B, sections 1 and 2, and based on the specifications in Appendix D.

5.3.2 The proposal according to 5.3.1 shall, prior to the Executive Board decision, be prepared by the Asset Group.

5.3.3 The Head of Risk Control shall comment on the proposal prior to discussion by the Asset Group and the Executive Board.

5.3.4 The Executive Board makes the strategic decisions presented in Appendix B, sections 1 and 2.

5.3.5 The question of whether to review the strategic decisions during the year shall be raised for discussion in the Asset Group, after which the preparation shall follow as described above (5.3.1-5.3.3).

5.4. The heads of department are responsible within their respective business areas for

(i) implementing and following up the application of these rules.

(ii) ensuring that the requirements for coordinating the activities in accordance with the Instructions for Sveriges Riksbank are applied when making decisions in accordance with these rules (compare Appendix E).

5.5. The Head of MOP decides within the bounds set by these rules on

(i) use of asset class,

(ii) approval of instrument types (compare Appendix A, section 2),

(iii) approval of country,

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(iv) approval of securities (incl. issuer), regardless of business,

(v) approval of counterparties, including their role as intermediary3,

(vi) approval of external managers (compare II.5.1),

(vii) the size of assets with very high liquidity that shall be available at different times,

(viii) the maximum extent to which the Riksbank may exceed or fall short of limits in connection with foreign exchange market intervention and principles for how such an excess or shortfall shall be resolved,

(ix) temporary breach according to 4.2 of the currency allocation limit in accordance with Appendix B,

(x) rules for securities lending conducted by another party on the Riksbank’s behalf,

(xi) what price sources to use for valuation,

(xii) methods for calculating limits,

(xiii) limits for individual approved counterparties,

(xiv) adoption of benchmark indices in accordance with the Executive Board's decision,

(xv) application procedure in accordance with Appendix E.

5.6. The Head of Risk Control decides within the bounds set by these rules on

(i) methods for the calculation, valuation and consolidation of exposures and financial risk,

(ii) principles for the application of external credit ratings,

(iii) framework for operational risks that describe how these risks are identified, measured, checked, limited and reported.

5.7. The Head of APP decides within the bounds set by these rules on the implementation of monetary and foreign exchange policy and the execution of currency exchanges and other foreign exchange transactions made with, or arising from payment orders from, Swedish government authorities and international organisations or given international agreements

6. Documentation of decisions

6.1. All decisions according to 5.5-5.7 shall be documented. In particular

(i) approved instrument types shall be entered on a list with a specification of any restrictions that apply to their use,

(ii) approved securities shall be entered on a list with a specification of the price source to be used for valuation,

(iii) approved counterparties shall be entered on a list with a specification of both the kind of transactions that can be performed with the counterparty and the limits that apply.

7. Formulation and communication of rules

7.1. the Head of Risk Control is responsible

3 Intermediary refers here to counterparties that are used as a correspondent bank (handles payments in foreign

currency for the Riksbank), custody bank (holds securities in custody for the Riksbank) or clearing of exchange-

traded or exchange-listed derivatives. See Appendix C, section 1.1.

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(i) where necessary, on his/her own initiative or on the initiative of the Head of MOP or

the Head of APP, for producing proposals for revisions of or additions to these rules and

(ii) For compiling these rules and the other rules and decisions referred to in these rules and for sending this compilation to all concerned divisions and departments.

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II. STARTING POINTS FOR THE ASSET MANAGEMENT

1. The Riksbank’s tasks

1.1. According to law the Riksbank’s tasks are to maintain price stability and to promote a safe and efficient payment system. As a consequence of these tasks the Riksbank holds financial assets.

1.2. It is also prescribed in law that the Riksbank hold financial assets in foreign currency.

2. Objectives

2.1. The management of the Riksbank’s financial assets is first and foremost to be carried out in such a way that ensures the fulfilment of the Riksbank’s tasks as specified above. This restricts the Riksbank’s room for manoeuvre in its management.

2.2. In addition, to the extent that it is not incompatible with 2.1 the financial asset management is to aim to generate a good return in the long term.

2.3. Regardless of the aim, the management is to be conducted as efficiently as possible.

3. General information about risk level

3.1. In the performance of its tasks, the Riksbank is exposed to financial risks. To some extent, although not completely, these risks can be limited through the choice of asset class, currency and counterparty, and in relevant cases through requirements for collateral.

3.2. However, the limitation of risk according to 3.1 must be weighed against the aim of achieving a good long-term return according to 2.2.

3.3. However, the extent of the risk-taking should be such that the losses that can arise in the day-to-day management of the Riksbank’s financial assets normally can be covered by that part of the Riksbank’s capital that is not required to cover, on the one hand, the costs of day-to-day operation and, on the other, losses that can arise in connection with credit provided to support liquidity in accordance with the Sveriges Riksbank Act.

3.4. Within the scope available for risk-taking according to 3.3, the Riksbank establishes annually the limits referred to in Appendix B, section 1, based on an assessment of the risk level desired by the Riksbank, taking into account the Bank’s tasks and other activities.

4. Basic conditions

4.1. Management of the financial assets should be conducted in a way that is not deemed capable of damaging the Riksbank's reputation, and as a consequence affecting the Riksbank’s ability to perform its public function.

4.2. The Riksbank’s routines should be consistent with what is considered to be good market practice for financial institutions and, where appropriate, for central banks.

4.2.1 Limits and the measurement of risk levels in the asset management shall be guided by market practice and the principles of the Basel Committee on Banking Supervision.

4.3. The asset management should have both good internal controls and an independent risk

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control of high quality.

4.4. Investment (trade) may only occur in instruments

4.4.1 for which there are established methods for market valuation,

4.4.2 for which there are generally established reporting principles that the Riksbank has decided to apply, and

4.4.3 if concerned staff understand the relevant handling processes for these instruments.

4.5. The implementation of transactions shall

4.5.1 be carried out in a professional manner and with observance of both the Riksbank’s ethical guidelines for asset management (Riksbankens etiska riktlinjer för tillgångsförvaltningen) and rules of conduct for the asset management, and

4.5.2 be reported in accordance with Rules for accounting and annual accounts at Sveriges Riksbank (Regler för bokföring och årsredovisning i Sveriges riksbank).

4.6. Investment (trade) in new kinds of business may only occur following a decision that has been prepared in accordance with Appendix E.

4.7. Transactions should only be performed with counterparties deemed to have a good professional reputation and adequate administrative routines.

5. Execution of the asset management

5.1. The asset management can be carried out by the Riksbank itself or by another suitable institution (“external manager”), provided that the implications in these rules and in strategic limits and decisions according to Appendix B can be fulfilled. The Head of MOP decides on the extent to which an external manager shall be used, given that the decision does not concern such matters regarding strategic issues outside the Riksbank’s business plan that the Executive Board is required to make a decision on.

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III. LIQUIDITY RISK

1. General

1.1. The rules in chapter III are not applicable to the activities in D, E, F, and G.4

2. Aim

2.1. The Riksbank holds assets in foreign currency in order to be able, among other things, to intervene in the foreign exchange market. To ensure that the Riksbank’s intervention policy can be fulfilled at all times, the Bank’s short-term intervention needs should be maintained by keeping part of the foreign exchange reserve in assets with very high liquidity and in currencies likely to be used for intervention.

2.2. An asset’s liquidity is defined on the basis of the amount that can be sold within the time period required to perform the Riksbank’s tasks without significant influence on the asset’s market price.

2.3. Given that the currency is one of those currencies that according to Appendix D, section 1.4.2 are “Probable intervention currencies” or “Other major currencies”, assets with very high liquidity are defined as

2.3.1 bonds issued by a state in the state's own currency, although not such bonds that have been lent or sold in a repurchase agreement (repo) and

2.3.2 cash balances on deposit at central banks in the respective country or at BIS.

3. Risk management

3.1. The lowest permitted holding of assets with very high liquidity shall be that specified in the decision on limits referred to in Appendix B.

3.1.1 The Head of APP can, to enable the execution of transactions regarding the activity in H, decide on a lower holding than that specified in 3.1. In such an event, the Head of MOP shall decide on the rate at which the holding is to increase in order for it to reach the level specified in 3.1.

3.2. The Riksbank’s holdings in individual securities issues and derivative contracts should be reasonable in relation to the total issued volume and the outstanding number of contracts in the issue in question.

3.2.1 The Head of MOP shall, in a separate procedure, decide on more detailed rules for such a restriction of holdings.

3.3. The Head of MOP is responsible for ensuring that the long-term requirements for intervention readiness are met and that the entire foreign exchange reserve, where necessary and within the time period required to perform the Riksbank’s tasks, should be able to be mobilised for interventions at reasonable costs.

3.3.1 As part of that, the Head of MOP shall decide how much of the holdings are to be available at different times.

4 See the list of activities in chapter 1, section 3.1.

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IV. MARKET RISK AND CREDIT RISK5

1. Aim

1.1. To limit the risk of incurring a loss in the financial assets as a result of changes in asset prices.

2. Measurement of risk

2.1. When estimating market risk, the market value of all the Riksbank’s financial assets should be included.

2.1.1 Assets regarding activity C should be shown at their book value.

2.1.2 The method used to estimate the Riksbank’s total market risk is Value at Risk (VaR). VaR states the probable maximum loss for a certain period, given a particular confidence interval and a certain amount of data.

2.1.3 The deviation mandate for activity A comprises deviations in positions from the defined benchmark indices (see Appendix D, section 0) on the basis of the strategic benchmark portfolio (see reference in Appendix B).

Deviations from defined benchmark indices are limited by specified deviation mandates measured as relative VaR or tracking error. These are shown in Appendix B.

2.1.4 The total VaR for the gold and foreign exchange reserve is divided into currency risk, interest rate risk and price risk.

2.1.5 Interest rate risk is also estimated in terms of the modified duration/delta 1%.

2.1.6 The Riksbank’s method for measuring market risks should include stress tests that show the sensitivity in the event of more extreme market developments.

2.2. Credit exposures in the balance sheet are measured at market value.

2.2.1 Credit exposures are measured in gross terms, and if risk-reducing measures have been taken the new exposure is measured as well.

2.2.2 As regards credit exposures off the balance sheet, an increase should be made for potential future exposures in accordance with market practice.

2.2.3 Securities that have been placed in custody at a custody bank should not be considered to be a credit exposure if they have been placed in custody in accordance with Appendix C, section 2.

5 Credit risk can be divided up into issuer risk, counterparty risk and settlement risk. Issuer risk is the risk that the

issuer will default. Other changes in value due to factors attributable to the issuer are viewed as a “spread risk” and

are included in the management of market risk. Counterparty risk is the risk that a borrower or a counterparty in a

transaction cannot fulfil its obligations (if it is not a settlement risk). Settlement risk arises when the counterparties’

obligations in a financial transaction are not fulfilled at exactly the same time.

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3. Risk management

3.1. Market risk is restricted by limits referred to in Appendix B.

3.2. Credit risk is restricted and followed up through requirements for credit rating level and through limits for exposures, concentration and settlement.

3.2.1 Limits should be established for individual counterparties and issuers, and the corporate groups to which they belong (consolidated level).

3.3. Risks in connection with the Bank’s own securities lending are restricted through requirements regarding borrowers’ credit ratings, as well as requirements for collateral in the form of assets that are approved for investment in the asset management.

3.4. Risks in connection with securities lending conducted by another party on the Riksbank’s behalf are restricted according to separate rules for such activities, which, in terms of credit risk, should be comparable with the credit risk specified in 3.3.

3.5. Financial transactions may only be performed with counterparties that meet the requirements in Appendix A and that have been approved as counterparty.

The approved counterparties should be indicated in separate lists.

3.6. Approved asset classes and instrument types are shown in Appendix A.

3.7. As regards the total net exposure in relation to a single country, the limits specified in Appendix B shall apply.

3.8. For exposures to issuers, the limits specified in Appendix B shall apply.

3.9. For net exposures and settlement exposures in relation to counterparties, the limits specified in Appendix B shall apply.

3.9.1 Within the bounds of these limits, the Head of MOP shall set net limits, gross limits and settlement limits for each individual counterparty. However, such gross limits shall not apply to the activities in D, E, F and G.

3.9.2 Exposures due to the activity in H shall be estimated separately. Together with the other exposures, such exposures should be included in the limits according to 3.9.1, but they may be exceeded if necessary for the activity to be carried out as intended.

3.9.3 The Head of MOP decides both how large the excess referred to in 3.9.2 may be, and the rate at which it shall be unwound.

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V. OPERATIONAL RISK

1. Aim

1.1. To limit the risk of incurring direct or indirect losses due to internal routines that are inadequate or not to the purpose, human error, insufficient compliance with laws, internal regulations and legal documentation6, defective systems or as a result of external events.7

2. Measurement of risk

2.1. Operational risks shall be identified annually by way of a method based on qualitative self-assessment.

2.2. The Riksbank should also have an established method for quantifying the Bank’s operational risks.

3. Risk management

3.1. The Riksbank’s asset management shall have a framework for operational risks that describe how these risks are identified, measured, checked, limited and reported.

3.2. Each department head is responsible for implementing the established framework.

3.3. Each department head is responsible for ensuring that there is a manual with up-to-date descriptions of routines and internal rules that cover the department’s spheres of responsibility.

3.4. Each division in the asset management shall annually identify, assess and limit the operational risk for all routines, instruments, processes and systems. A risk assessment shall also be carried out in connection with operational changes.

3.5. Documented business continuity plans should exist to ensure that the operations can be conducted also during extreme situations, and at a different location than the head office.

6 Deficiencies in legal documentation are classified as legal risk (section VI). 7 Examples of commonly occurring operational risks are: deficiencies in internal controls; process or transaction

errors, technical or system errors; administrative errors; crime: fraud; and loss of or damage to assets.

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VI. LEGAL RISK

1. Aim

1.1. The legal documentation of the Riksbank’s business relationships shall, in a legally tenable manner, correspond to the agreed business operations, risk level and division of responsibilities between the Riksbank and its counterparties. Legal risks in the asset management over and above this shall be minimised.

2. Risk management

2.1. To document the operations and risk level agreed by MOP, APP and AFS. Transactions and business relationships shall be documented in the manner and form that is the best standard in the respective market, if possible from a central bank perspective.

2.1.1 The division of responsibilities between the parties shall be reasonably assigned with regard to the Riksbank’s position.

2.1.2 The documentation shall comply with the applicable national legislation in each individual case.8

8 E.g. netting and insolvency rules.

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VII. EVALUATION AND REPORTING

1. Aim

1.1. To ensure efficient asset management, adequate reporting of the management shall be made to concerned persons. By way of tailored, regular reporting the Executive Board, heads of department and other concerned parties shall receive up-to-date and correct information about the asset management that is sufficiently comprehensive.

2. Scope and frequency

2.1. Limit breaches shall be reported immediately to the delegator of the limit.

2.2. Monthly, the heads of department affected by the asset management and other members of the Asset Group shall receive a combined report regarding the asset management’s return and its utilisation of assigned risk mandates with respect to credit risk and market risk. Return and risk shall also be evaluated in relation to the strategic benchmark portfolio.

2.3. Every four months the Executive Board shall receive an overall report regarding the asset management’s return and total risk exposure. The risk exposure shall be itemised in terms of the asset management’s liquidity risks, credit risks, market risks and operational risks. The report shall also include an analysis of the risk-adjusted return and a report of the asset management’s compliance with established risk mandates.

2.4. At least annually the Executive Board shall receive both an overall report of the results of the asset management taking into account the management costs and an evaluation of the strategic benchmark portfolio over a longer period as well as the utilised risk mandate with regard to liquidity risk, credit risk and market risk.

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APPENDICES

A. INVESTMENT RULES

1. General 1.1. A country can be approved within the scope of these rules if the country is a member of

the OECD9 and has an external credit rating at least equivalent to the lowest rating specified in Appendix B, section 3.

1.1.1 Decisions to approve countries are made by the Head of MOP.

2. Permitted issuers and instrument types

2.1. Non-equity-related debt instruments issued by an issuer domiciled in an approved country, although only for the activities in A, D, E, F and G.10

2.1.1 The rules in 2.1 are not applicable to the activities in H, I, J, and K.

2.1.2 For the activity in F, although only debt instruments that are approved as collateral according to the RIX rules and regulations.

2.1.3 An issuer can be a government, a central bank, an international body, a local or regional authority or a company.

2.1.4 The issuer must have a sound financial position, defined as the issuer or the debt instrument in question having an external credit raring at least equivalent to the lowest rating specified in Appendix B, section 3.

2.2. Lending to (in the form of deposits in) a central bank or credit institution11 domiciled in an approved country.

2.2.1 For the activities in D and G, although only lending to counterparties according to the

RIX rules and regulations against approved collateral as specified in the RIX rules and regulations.

2.3. Lending to (in the form of deposits in) the BIS, the International Bank for Reconstruction and Development (IBRD), the International Monetary Fund (IMF), and international bodies.

2.4. Lending (in the form of deposits) to securities companies domiciled in an approved

country, although only for the activity in G.

2.5. Other receivables from the IMF, although only for the activity in B.12

9 Organisation for Economic Co-operation and Development. 10 See the list of activities in chapter 1, section 3.1. 11 Credit institution refers to banks, foreign bank companies, credit market companies and foreign credit institutions. 12 The IMF can, to some extent, influence the management of these assets.

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2.6. Repos, reverse repos and securities lending with regard to debt instruments according to

2.1, although only for the activities in A and E.

2.6.1 For the activity in E, although only reverse repos against collateral that are approved according to the RIX rules and regulations.

2.7. Currency – spot, in any of the currencies in which investment can be made according to the strategic limits that are referred to in Appendix B, although only for the activities in A, H, I, J and K.

2.8. Gold – spot, with counterparties domiciled in an approved country, although only for the activity in A.

2.9. Asset that can be derived from an asset (derivative contract) that is permitted to invest in according to 2.1-2.8.

2.9.1 This assumes that the terms and conditions for the asset are in no way dependent on the value or price of an asset in which it is not permitted to invest.

2.9.2 This also assumes that the issuer of the contract is domiciled in an approved country.

2.9.3 Fictitious assets that would fulfil the requirements in accordance with 2.1-2.8 if they existed are placed on an equal footing with assets that are permitted for investment according to 2.1-2.8.

2.10. An asset according to 2.9 is only permitted for the activity for which the underlying asset is permitted to invest in, provided that this is not further restricted by what is specified below.

2.10.1 If the underlying asset comprises debt instruments in accordance with 2.1 or deposits in accordance with 2.2-2.4., only assets of option type are permitted for the activity in A. This also assumes that they are listed on an exchange or other authorised marketplace.

2.10.2 If the underlying asset is a currency in accordance with 2.7, only assets of option type are permitted for the activities in A and H.

2.10.3 If the underlying asset is gold in accordance with 2.8, only assets of option type are permitted for the activities in A.

2.11. Mutual funds provided that these invest exclusively in assets that are permitted according to these rules.

2.12. Equities, although only for the activity in C.

2.13. Investment in assets according to 2.1 that have been issued by companies, or in assets that according to 2.9 can be derived from such assets, shall fulfil the Riksbank’s ethical investment rules.

2.14. To facilitate the administration of financial transactions and positions, loans may be raised to a limited extent.

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3. Counterparties with which financial transactions may be performed

3.1. A counterparty can be a central bank, an international body, the BIS, a credit institution or a securities company domiciled in an approved country.

3.1.1 For the activities in D, E, F, G, H, I, J and K, the counterparty requirements in the RIX rules and regulations apply.

3.1.2 For the activity in D, only a credit institution can be a counterparty.

3.1.3 For the activity in F, only a credit institution or a securities company can be a counterparty.

3.1.4 For the activity in G, a central bank, international organisation or the BIS cannot be a counterparty. However, a clearing organisation can be a counterparty.

3.1.5 For the activities in D, F and G, the counterparty must be a participant in RIX.

3.2. Credit institutions and securities companies must be under the prudential supervision of a public authority or other competent body in the home country.

3.2.1 For the activity in I, the supervisory requirement applies to all counterparty categories.

3.2.2 By prudential supervision is meant that a competent public authority

(i) issues special authorisations for the supervised entity in accordance with expedient and predetermined suitability criteria,

(ii) regularly monitors the supervised entity’s financial position and ensures that the licence criteria are being upheld, where appropriate at group level, and

(iii) implements effective sanctions if the licence criteria are no longer being met, with the aim of rectifying the situation or to ensure that the entity is wound up in an orderly manner.

3.3. International organisations, credit institutions and securities companies must have an external credit rating at least equivalent to the lowest rating specified in Appendix B, section 5.1.

3.3.1 For the activities in D, E, F and G, the requirements according to the RIX rules and regulations apply.

3.3.2 For intermediaries, the requirements in Appendix C apply.

3.4. The requirement for counterparties regarding an external credit rating can be met if a counterparty’s obligations are guaranteed by another party that has such a credit rating. Such a guarantee must be designed in such a way that the credit risk is not deemed to be larger than if the counterparty itself had this credit rating.

3.4.1 The requirement for counterparties regarding an external credit rating with regard to the purchase and sale of securities for delivery versus payment can also be met if the counterparty’s parent company meets this requirement.

3.4.2 For counterparties that are intermediaries, the special requirements set out in Appendix C also apply.

3.5. Banks or other Swedish institutions under the supervision of Finansinspektionen (the

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Swedish Financial Supervisory Authority) cannot be

(i) an issuer of instruments according to section 2,

(ii) a borrower (recipient of deposits), or

(iii) a counterparty with regard to derivative contracts that have not been issued by an exchange or other authorised marketplace.

3.5.1 This restriction does not apply to the activities in D, E, F, G, H and I or foreign exchange swaps and FX forward contracts in activity A, J and K.

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B. LIMITS

1. Strategic limits

1.1. Over and above what is specified in 3-8, the operations are governed by the strategic limits that are annually decided by the Executive Board. These cover:

(i) the size of the gold and foreign exchange reserve (activity A)13, (ii) the size of other assets in foreign currency (activity K), (iii) the target level for the monetary policy repo (activity E), (iv) the minimum holdings of assets with very high liquidity, (v) the currency breakdown and allocation between different asset classes for the

strategic benchmark portfolio, (vi) any restrictions for certain asset classes in the strategic benchmark portfolio, (vii) the maximum interest rate risk, measured according to what is specified in

chapter IV, section 2.114, (viii) the deviation mandate in relation to the strategic benchmark portfolio.

2. Other strategic decisions

2.1. Over and above the strategic limits, the other strategic decisions decided annually by the Executive Board also apply. These cover at least:

(i) the extent of trade in foreign exchange swaps according to the RIX rules and regulations (activity I).

3. Exposure limits for countries

3.1. The total net exposure in relation to a country where the issuer and counterparty are domiciled may be no higher than the following amounts in SEK million, depending on credit rating: Credit rating15 Limit AAA Unlimited AA 20 000 A 8 000 BBB 4 000

13 See the list of activities in chapter 1, section 3.1. 14 Credit risk and currency risk are taken into account when calculating the total risk of loss, but are limited by way of

country limits, issuer limits and counterparty limits according to sections 3-8 below, or by way of currency allocation

and the deviation mandate for this according to what is referred to in Appendix B. 15 In the regulations, credit ratings are specified throughout according to the nomenclature used by Standard &

Poor’s. The Head of AFS decides how different credit ratings are to be treated in this context.

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4. Concentration limits for countries

4.1. The maximum permitted exposure per region is (measured as a percentage of the total financial assets): North America 60 % Asia and Oceania 20 % Europe 75 %

5. Exposure limits for issuers

5.1. The net exposure in relation to a single issuer may be no higher than the following amounts in SEK million, depending on credit rating and type of issuer: Credit rating Limit government Limit others AAA Unlimited 5 000 AA 20 000 3 500 A 8 000 1 500 BBB 4 000 750

5.1.1 Government-backed issuers are classed the same as governments.

6. Concentration limits for issuers

6.1. The total net exposure in relation to issuers with a highest credit rating of A must not exceed SEK 10 000 million.

6.2. The total net exposure in relation to issuers with a credit rating of BBB must not exceed SEK 5 000 million.

6.3. The total exposure in relation to issuers in one and the same company sector (industry) must not exceed SEK 25 000 million.

7. Exposure limits for counterparties

7.1. The exposure in relation to a counterparty may be no higher than the following amounts in SEK million, depending on credit rating and type of exposure: Credit rating Net limit Settlement limit AAA 2 500 2 500 AA 2 000 2 000 A 800 800 BBB 400 400

7.1.1 Counterparties that are an intermediary may be granted a larger settlement limit than that specified above.

8. Concentration limits for counterparties

8.1. The total net exposure in relation to counterparties with a highest credit rating of A must not exceed SEK 2 000 million.

8.2. The total net exposure in relation to counterparties with a credit rating of BBB must not exceed SEK 1 000 million.

8.3. The total net counterparty exposure must not exceed SEK 27 000 million.

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9. Aggregation of limits

9.1. If an institution or a closely related group of institutions is both an issuer and a counterparty, the sum of the established limits, in addition to what is specified above, must be less than the highest amount of the limits according to 5.1 and 7.1.

10. Change of limits due to downgraded credit rating

10.1. A downgraded credit rating for a country, issuer or counterparty may, in accordance with the above rules, require a reduced limit.

10.1.1 If an immediate application of such a lower limit is deemed capable of having a significantly negative impact on the stability or functioning of a financial system or market, the Head of MOP may decide, if so can occur without unduly jeopardising the Riksbank’s interests, to suspend the implementation of the lower limit for a limited period of time. However, such an suspension may apply for no longer than 30 days.

10.1.2 In the event that it would cause harm to the Riksbank, the Head of MOP may decide that the lower limit does not have to be implemented, whereby the Riksbank prematurely settles positions.

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C. SPECIAL REQUIREMENTS FOR INTERMEDIARIES

1. Definition

1.1. Intermediary refers here to counterparties that are used as a correspondent bank (handles payments in foreign currency for the Riksbank), custody bank (holds securities in custody for the Riksbank) or for clearing of exchange-traded or exchange-listed derivatives.

2. Agreement regulation

2.1. Securities accounts must be separate from the intermediary’s assets.

3. Limits

3.1. The intermediary must, at the time of entering into the agreement, have a lowest external credit rating of AA-.

3.2. The intermediary must never have an external credit rating lower than A-.

3.3. The value of assets deposited with an individual custody bank must be checked if it exceeds SEK 35 000 million.

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D. PRINCIPLES FOR ESTABLISHING THE STRATEGIC BENCHMARK PORTFOLIO

1. General

1.1. This appendix stipulates the framework for defining the strategic benchmark portfolio.

1.2. The Head of MOP is responsible for producing background material and drawing up a concrete proposal for a decision regarding a strategic benchmark portfolio.

1.3. The strategic benchmark portfolio consists both of a proposed currency allocation and a proposed asset allocation, which are to apply for activity A excluding gold-related assets, and for activities I, J and K.16

1.3.1 The decision regarding the strategic benchmark portfolio also covers benchmark indices

and rules for re-balancing.

1.4. The strategic benchmark portfolio must have a diversified asset and currency composition, which reflects the aim of the foreign exchange reserve and complies with the rules in Appendices A and B.

1.4.1 The currency allocation in the strategic benchmark portfolio must conform to the specifications below. The currency composition applies for the activities in A, B, H, I, J and K.

1.4.2 Probable intervention currencies

USD 10 – 60 % EUR 10 – 60 % Aggregate for all Probable intervention

currencies 2017 – 70 %

Other major currencies

GBP 0 – 20 %

JPY 0 – 20 %

Aggregate for all Other major currencies 0 – 40 % Other smaller currencies

CAD 0 – 10 %

AUD 0 – 10 %

DKK 0 – 10 %

NOK 0 – 10 %

CHF 0 – 10 %

NZD 0 – 10 %

Aggregate for all Other smaller currencies 0 – 40% Total 100 %

16 See the list of activities in chapter 1, section 3.1. 17 Although equivalent to at least SEK 25 000 million.

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1.5. The asset allocation must conform to the specifications below, and also comply with the

rules in Appendices A and B.

1.5.1 Asset class Govern

ment

securiti

es18

Inflation-

linked

securities

19 issued

by

governm

ents

Governm

ent-

backed20

securities

Supra-

nationals

21

Agencies

22

MBS23

ABS24

Corporate

debt25

Minimum exposure of total26

50 %27 0 % 0 % 0 % 0 % 0 % 0 % 0 %

Maximum exposure of total

100 % 80 % 80 % 30 % 15 % 15 % 15 % 10 %

Sector exposure

- - - - Sector exposure according to chosen

index

Sector exposure

according to chosen index

Minimum 50 % of total

1.6. The strategic benchmark portfolio is realised by creating a benchmark index for each asset class. The indices must meet the requirements set in these rules and reflect the objective of the asset management, be representative of the Riksbank’s investment focus and be possible to track with a passive investment strategy.

18 Debt securities issued by a government. 19 Inflation-protected debt instruments 20 Debt instruments in government-backed loans or from a government-backed issuer. 21 Debt securities issued by supranational or international bodies. 22 Debt securities issued by Government-Sponsored Enterprises (GSE) in the USA. 23 Debt securities backed by loans that in turn are backed by residential property (e.g. German ”Pfandbriefe” or

other mortgage-backed securities). 24 Other debt instruments than those covered by footnote 23 and that have been backed by various assets (Asset-

backed securities). 25 Other company-issued debt instruments than those referred to in footnotes 21-24. 26 Of the strategic benchmark portfolio. 27 Although at least SEK 25 000 million.

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E. APPLICATION PROCEDURE FOR DECISIONS THAT ENTAIL CHANGES IN THE

ASSET MANAGEMENT

1. General

1.1. To ensure comprehensive preparation with the participation of all relevant divisions at the Riksbank prior to decisions that entail changes in the asset management, there should be one or more processes to describe this.

1.2. This appendix is applicable

(i) when introducing a new asset class, (ii) when approving a new type of instrument, (iii) when approving countries, (iv) when approving securities, (v) when approving counterparties, (vi) when approving a counterparty as intermediary, (vii) when approving an external asset manager, (viii) when deciding on limits, including the breaching of limits according to

chapter IV, 3.9.3 and exceptions according to Appendix B, section 10, (ix) when deciding on the application procedure with regard to points (i)-(viii)

above, (x) when deciding on rules for discretionary securities lending, (xi) when deciding on methods for calculating and evaluating exposures, risk,

results and limits, for the use of price sources and the establishment of external credit ratings and methods for quantifying operational risks (compare chapter I, section 5.6),

(xii) when developing and establishing internal routines and rules (compare chapter V, section 3.4), and

(xiii) in the event of a significant change in previous conditions.

1.3. The elements of the preparation process are, where applicable,28 at least the following:

(i) description of transaction structure with economic analysis, (ii) description of needs with regard to training, system development and

other internal and external resources, (iii) description of transaction flow including how settlement/clearing of

transactions shall be performed, (iv) analysis of financial risks (liquidity risk, credit risk, currency risk and

interest rate risk) and how these can be measured and should be managed,

(v) analysis of operational risks and how these can be limited, (vi) analysis of the legal risks and how these can be limited,

28 Not all aspects are relevant for some decisions.

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(vii) analysis of reputation risk aspects, incl. ethical aspects according to the

Riksbank’s ethical guidelines for the management of the foreign exchange reserve (Riksbankens etiska riktlinjer för valutareservsförvaltningen),

(viii) description of how risk management shall be performed, with a specification of mandates/limits, valuation, accounting and reporting, and

(ix) plan for implementation.

1.4. The concerned departments (and divisions within these departments) are

1.4.1 MOP, with regard to both the overall business- or policy-related responsibility and the responsibility for the execution and administration of transactions, as well as system ownership responsibility,

1.4.2 APP, on the basis of the responsibility for implementing monetary and foreign exchange policy and the execution of currency exchanges and other foreign exchange transactions made with, or arising from payment orders from, Swedish government authorities and international organisations or given international agreements

1.4.3 ADM, with regard to responsibility for reporting of financial assets and liabilities,

1.4.4 AFS, with regard to responsibility for risk control and possible system ownership responsibility as well as for financial stability in a broader sense, and

1.4.5 the General Secretariat (STA), with regard to its function to provide legal advice, including the design of agreements.

1.5. Before a decision is made by a party that according to these rules is required to make a certain decision, all other concerned parties according to 1.4 must give an opinion on the matter.

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