“Approved”
Financial Markets Supervisory Authority
of the Republic of Azerbaijan

Resolution № 1851100013
16 November 2018

Acting Chairman of the Management Board

______________________ Ibrahim Alishov

Regulations on setting open currency position limits in banks

General provisions

These Regulations have been developed in accordance with Article 34.2.11 of the Law of the Republic of Azerbaijan on Banks and govern setting open currency position and its limits for the banks and local branches of foreign banks operating in the Republic of Azerbaijan (hereinafter – the banks) to regulate exchange rate risk.

Definitions

2.1. The definitions used herein bear the following meanings:
2.1.1. currency position – bank claims and liabilities in foreign currency and bank metals;
2.1.2. open currency position – difference between the amounts of bank’s balance and off-balance sheet claims (hereinafter – claims) in individual currencies, as well as bank metals and balance and off-balance sheet liabilities (hereinafter – liabilities);
2.1.3. short open currency position – an open currency position where the amount of bank’s liabilities in any currency exceed the amount of its claims;
2.1.4. long open currency position — an open currency position where the amount of bank’s any foreign currency claims exceed the amount of its liabilities;
2.1.5. net open currency position —an indicator that is absolutely quantitatively large between the sum of all long open currency positions in manat equivalent and the sum of all short open currency positions in manat equivalent;
2.1.6. closed currency position – where the amount of bank’s claims in any foreign currency are equal to the amount of its liabilities;
2.1.7. open currency position limit – the limit set herein on the ratio of manat equivalent of the open currency position to bank's aggregate capital;
2.1.8. freely convertible currency (FCC) – currencies specified in Annex 1 herein;
2.1.9. closed currencies – currencies other than those specified in Annex 1 herein;
2.1.10. exchange rate of the day - the official exchange rate of manat against foreign currencies set by the Central Bank of the Republic of Azerbaijan (hereinafter - the Central Bank) or the cross rate calculated on the official exchange rate on the date of calculation of the open currency position;
2.1.11. structural currency position – long-term currency positions adopted to minimize the impact of currency risks on bank's capital. Such a position includes establishment of subsidiaries by banks abroad, issue and placement of shares in a foreign currency and positions opened on other non-speculative transactions, etc.;
2.1.12. hedging - prevention of losses due to exchange rate fluctuations through derivative financial instruments, as well as forward contracts.
2.2. The definition ‘foreign currency’ used herein bears the meaning specified in the Law of the Republic of Azerbaijan on Currency Regulation and the definition ‘bank metals’ the meaning specified in the Law of the Republic of Azerbaijan on Precious Metals and Stones.

Open currency position limits

3.1. The following is considered when calculating open currency position per currency:
3.1.1. net spot position (total liabilities (including accrued interest) are deducted from total assets in a relevant foreign currency);
3.1.2. net forward position (difference between amounts to be received and paid under forward contracts);
3.1.3. realizable and non-refundable guarantees (already claimed by the beneficiary) and similar instruments (e.g. credit lines, letters of credit, etc.).
3.2. When calculating the open currency position on credit lines, the following loan conversion factors are applied:
3.2.1. if maturity is up to 1– 20% (twenty) (credit conversion factor (CCF) – 0,2);
3.2.2. if maturity is over 1 year– 50 % (fifty) (CCF – 0,5);
3.2.3. if the bank is granted the right unilaterally not to fulfill commitments in full on a contractual basis – 10% (ten) (CCF – 0,1).
3.3. When calculating the open currency position, the assets written off at the expense of reserves from the balance sheet and recorded in off-balance sheet accounts are excluded.
3.4. When calculating the open currency position, balance sheet assets are recorded less relevant reserves (general and targeted reserves).
3.5. All hedging agreements concluded by the bank are taken into account when calculating the open currency position. If the bank concludes a hedge agreement, relevant information is delivered to the Financial Markets Supervisory Authority (FIMSA) and the Central Bank. The form of the delivered information is determined by the FIMSA. In case of non-performance of the concluded hedge agreement, the bank notifies the FIMSA and the hedge agreement may be executed by the Central Bank upon the request of the FIMSA.
3.6. When calculating the open currency position, off-balance sheet liabilities (less the part secured with funds in deposit accounts and guarantees of banks with minimum investment rating issued by international rating agencies on long-term liabilities, as well as guarantees of the banks operating in the Republic of Azerbaijan whose credit rating issued by international rating agencies is maximum of 2 (two) points below the country's (sovereign) debt rating) are considered in net amount.
3.7. When calculating the open currency position, structural currency positions are excluded.
3.8. The open currency position is calculated by the bank on a daily basis at the exchange rate of the day for freely convertible and closed currencies.
3.9. To limit the risks associated with changes in the exchange rate and the value of bank metals, the open currency position limit should not exceed the limits set in Annex 3 herein.
3.10. Open currency position limits apply only to final indicators of the trading day, not taking into account the currency positions opened by banks during the trading day.

Report on the open currency position

4.1. Daily, weekly and monthly reports on open currency positions are prepared as per Annex 2 herein.
4.2. A daily report on the open currency position is submitted to the FIMSA by 15:00 on the next working day, weekly reports on days – on the first working day of the next week, and monthly reports on the first working day of the following month.
4.3. The report includes summary data on branches and departments located both within the country and abroad. Banks with branches and divisions outside the territory of the Republic of Azerbaijan also submit a report that does not contain information on these branches and divisions.

Final provisions

These Regulations take effect 3 (three) days after being published in the electronic version of the State Register of the Republic of Azerbaijan on Legal Acts.

Annex 1
to the Regulations on setting open
currency position limits in banks

LIST
of freely convertible currencies used for the purposes of these Regulations on setting open currency limits in banks

Annex 2
to the Regulations on setting open
currency position limits in banks

REPORT on open currency position (_____________20___-__ )

Annex 3
to the Regulations on setting open
currency position limits in banks