Instruction on the Procedure for Compliance with Open Currency Position Limits by Microfinance Companies

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Creation date: 2025-01-27

Appendix

to the Resolution of the Board of the National Bank of the Kyrgyz Republic

of May 30, 2014 No. 24/8

INSTRUCTION

on the procedure for compliance with open currency position limits by microfinance companies

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of November 27, 2014 No. 53/9, March 11, 2015 No. 16/2, September 16, 2015 No. 53/8, May 31, 2017 No. 21/8, April 22, 2020 No. 2020-P-33/24-2, December 23, 2020 No. 2020-P-33/73-13, December 21, 2022 No. 2022-P-12/81-7, January 22, 2025 No. 2025-P-12/2-3-(NFBU))

1. General Provisions

2. This Instruction is developed for the purpose of preventing currency risks in the activities of microfinance companies (hereinafter - MFCs), including those conducting operations in accordance with Islamic principles of banking and financing, taking into account the requirements of Sharia standards and the special terminology applied by them in carrying out banking operations.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of May 31, 2017 No. 21/8)

2. When developing internal policies and procedures for monitoring compliance with open currency position limits, MFCs must be guided by the requirements of this Instruction.

MFCs conducting operations in accordance with Islamic principles of banking and financing must additionally be guided by the Sharia standards approved by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8)

3. For the purposes of this Instruction, the following definitions apply:

Currency risk is the risk of an MFC incurring losses due to a change in the value of the MFC's claims (assets)/obligations denominated in foreign currency, in the event of an unfavorable change in the exchange rate, at the time when the MFC has an open currency position in that currency. A currency position arises from the conduct of currency transactions and is an indicator of the degree of exposure of the MFC to currency risk.

Currency transactions are transactions for the issuance of loans, acceptance of time deposits (deposits) in foreign currency, as well as other transactions that result in a change in claims (assets) or obligations denominated in foreign currency.

Net currency position is the difference between the claims (assets) and obligations of the MFC, both on-balance sheet and off-balance sheet, in each separate foreign currency.

If the claims (assets) and obligations of the MFC in the corresponding currencies do not match, the currency position is considered open, and if they are equal, it is considered closed.

An MFC's open currency position can be long (in case of excess of claims (assets) in the corresponding currency over its obligations in the same currency) or short (in case of excess of obligations over claims (assets)). A long currency position is recorded with a "+" sign, and a short one with a "-" sign.

Official rate is the official exchange rate of foreign currencies against the Kyrgyz som, determined by the National Bank of the Kyrgyz Republic (hereinafter - the National Bank) in accordance with the Rules for determining the official exchange rates of foreign currencies against the Kyrgyz som by the National Bank of the Kyrgyz Republic, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 28, 2013 No. 10/15.

Aggregate currency position is the sum of all net currency positions of the MFC for each foreign currency, calculated using the "short hand" method as defined in paragraph 8 of this Instruction.

The MFC's own capital is calculated in accordance with the rules for regulating the activities of microfinance companies in the territory of the Kyrgyz Republic, approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic of February 19, 2003 No. 4/2.

Open currency position limits are restrictions established by the National Bank, expressed as a percentage ratio of open currency positions (for each foreign currency and in aggregate) to the MFC's own capital. The size of the MFC's own capital as of the 1st day of the reporting month is taken into account. Open currency positions are calculated in Kyrgyz soms at the official rate established by the National Bank. Open currency position limits are calculated in percentages, rounded to two decimal places after the decimal point.

Transaction date is the date of reaching an agreement by the parties on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, value date, etc.).

Value date

– is the date on which funds are credited to the accounts of the transaction participants.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of March 11, 2015 No. 16/2)

2. Procedure for Calculating Open Currency Positions

3. As of the end of each business day, MFCs must calculate the following indicators:

• net currency positions for each foreign currency;

• aggregate currency position.

5. Net currency positions are calculated separately for each foreign currency as the sum of the following indicators:

• net spot position in foreign currency. This value is calculated as the difference between on-balance sheet assets and on-balance sheet liabilities (including unfinished "spot" contracts with a value date up to 2 days and "spot" contracts that are part of "swap" contracts), including accrued interest income/expenses in that foreign currency. In this case, assets and liabilities are included in the calculation at their net book value. For the purposes of this Instruction, a "swap" contract is understood as a transaction representing a combination of two transactions: "spot" and "forward" contracts for the same amount (the principal amount of the "swap" contract), with the same counterparty, for a certain period of time;

• net forward position in foreign currency. This value is calculated as the difference between claims and obligations under "forward" contracts (including futures), as well as "forward" contracts that are part of "swap" contracts (the principal amount of the "swap" contract);

• guarantees issued by the MFC denominated in foreign currency, except for guarantees secured in the same foreign currency. At the same time, these guarantees are included in the calculation of the net currency position from the moment the beneficiary (beneficiary) submits a claim for payment of the monetary amount under the obligation or upon receipt by the MFC of documented information indicating a high probability of a claim for payment under the specified guarantees. For example, a letter from the beneficiary regarding non-performance (delay in performance) of the principal's obligations is a basis for including the guarantee in the calculation of the net currency position.

6. Currency transactions are included in the currency position calculation from the transaction date and its reflection in the balance sheet, including transactions containing a future value date that is not the transaction date.

7. The calculation of net currency positions for each foreign currency is carried out in som equivalent at the current official rate established by the National Bank as of the reporting date.

8. The aggregate open currency position for all foreign currencies is calculated using the "short hand" method, i.e., the calculation is carried out by summing separately all long net currency positions and separately all short net currency positions for each foreign currency. Then the resulting values are compared with each other (in absolute value, expressed in Kyrgyz soms at the official rate established by the National Bank), and the largest of the two values (sum of all long net currency positions or sum of all short net currency positions) is used in the calculation of the limit for the aggregate open currency position.

9. Limits of Open Currency Positions

10. (Lost force in accordance with Resolution of the Board of the National Bank of the Kyrgyz Republic of November 27, 2014 No. 53/9)

11. For MFCs that borrow funds from founders (shareholders) within the limits established by the National Bank, borrow funds from legal entities and place them in the manner and on terms provided by the legislation of the Kyrgyz Republic, and/or carry out the following permitted foreign currency transactions specified in the license issued by the National Bank, namely:

• issuance of microloans;

• attraction of time deposits (deposits) from individuals and legal entities on a repayable basis;

• purchase and sale of debt obligations (factoring);

• issuance of guarantees in the amount established by the National Bank,

the following limits are established:

1. the size of the open long/short currency position for each foreign currency must not exceed as of the end of the business day:

• for currencies whose official rates are established by the National Bank - 15% of the MFC's own capital, calculated as of the 1st day of the reporting month;

• for currencies whose official rates are not established by the National Bank, the net currency position must be closed;

2. the size of the aggregate currency position for foreign currencies whose official rates are established by the National Bank, as of the end of the business day, must not exceed 20% of the MFC's own capital, calculated as of the 1st day of the reporting month.

11. MFCs are obliged to comply with the established limits of open currency positions at the end of each business day.

12. Exceedances of the established limits of open currency positions cannot be carried over by MFCs to the next business day. By the end of the current business day, the limits must be brought into compliance with the requirements of the National Bank.

13. The size of open currency positions during the business day is controlled by the MFC independently, based on its own assessment of the permissible level of currency risk. At the same time, each MFC must keep the sizes of currency risk during the day in accordance with the internal currency risk management policy approved by the Board of Directors, Supervisory Board, or other authorized person in accordance with the constituent documents of the MFC.

14. The maximum value of the limit for the aggregate open currency position for individual MFCs may be reduced by a decision of the Supervisory Committee of the National Bank, in case of identification of an extremely high level of currency risk assumed by such MFCs.

15. Reports on Open Currency Positions and Procedure for Their Submission

16. MFCs conducting foreign currency transactions based on a license from the National Bank must submit to the National Bank daily by 9:00, and those located in other regions of the republic - to the corresponding regional department, the Representation of the National Bank in the Batken region, on electronic media, a daily report on open currency positions as of the end of the previous business day according to Appendix 1 to this Instruction.

MFCs conducting operations in accordance with Islamic principles of banking and financing within the "Islamic window", conducting foreign currency transactions based on a license from the National Bank, must submit to the National Bank daily by 9:00, and those located in other regions of the republic - to the corresponding regional department, the Representation of the National Bank in the Batken region, on electronic media, the following reports on open currency positions: for operations conducted in accordance with Islamic principles of banking and financing; for operations other than those conducted in accordance with Islamic principles of banking and financing; a summary report on all MFC operations in foreign currency.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of November 27, 2014 No. 53/9, September 16, 2015 No. 53/8, April 22, 2020 No. 2020-P-33/24-2)

16. (Lost force in accordance with Resolution of the Board of the National Bank of the Kyrgyz Republic of April 22, 2020 No. 2020-P-33/24-2)

17. MFCs with branches must include summary data on open currency positions in the report, taking into account the data of all branches.

18. Measures of Impact for Violation of Established Limits of Open Currency Positions

19. In case of violation by an MFC of the established limits of open currency positions, the National Bank applies measures of impact in the form of collecting a monetary fine from the MFC in the amount of 5 (five) percent of the amount exceeding the limit of the open currency position, but not more than 10 (ten) percent of the book value of the MFC's assets in accordance with the Regulation "On measures of impact applied to non-bank financial-credit organizations and other legal entities under the supervision of the National Bank of the Kyrgyz Republic", approved by the Resolution of the Board of the National Bank of the Kyrgyz Republic.

Note: Exceeding established limits within 0-0.05% does not entail the application of a fine.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of May 31, 2017 No. 21/8, April 22, 2020 No. 2020-P-33/24-2, December 23, 2020 No. 2020-P-33/73-13)

19. In case of systematic (2 or more times within consecutive 30 calendar days) violation by an MFC of the established limits, the National Bank may apply other measures of impact provided for by legislation and normative legal acts of the National Bank, up to the revocation of the license.

20. Any attempts by an MFC to somehow avoid reflecting the real currency position in reporting are considered as:

• attempts to mislead the National Bank;

• unhealthy banking practice;

• manipulation of the currency position with the purpose of distorting its real value, i.e., conducting dubious transactions, the origin and commission of which cannot be clearly identified and/or, if these transactions affect the financial reporting of the MFC and its economic indicators;

• submission of unreliable financial and regulatory reporting by the MFC.

In case of unreliable reflection of the currency position, appropriate measures of impact will be applied to the MFC, up to the revocation of the license.

21. In case of violation of any of the requirements of this Instruction, the management of the MFC is obliged to immediately inform the National Bank about the violations committed and submit written explanations regarding the reasons for the violation committed within two days, along with a list of measures taken by the MFC to eliminate it.

22. Organization of Internal Control for Foreign Currency Transactions

23. To conduct foreign currency transactions, MFCs must develop an internal currency risk management policy and organize adequate internal control.

24. For each foreign currency transaction conducted, corresponding procedures must be developed, which must reflect at least the following:

• separation of functional responsibilities of MFC employees in such a way that one employee cannot perform and/or control any process in full from initiating the transaction to its accounting in the books;

• clear order of authorization of conducted transactions and their volume by corresponding authorized MFC employees;

• internal limits of open currency positions for each foreign currency and in general for all currencies;

• level of sufficiency of information on the reliability of counterparties, depending on the nature and degree of risk of the transactions conducted and the category of the counterparty;

• requirements for internal audit when conducting checks of currency transactions (at least, independence of auditors and their having the necessary qualifications and knowledge);

• requirements for accounting and reporting on currency transactions for the MFC and its branches (form, frequency of submission, responsibility).

7. Features of Currency Transactions of an MFC Conducting Operations in Accordance with Islamic Principles of Banking and Financing

(Section as amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8)

24. An MFC has the right to conduct transactions for the purchase and sale of foreign currency provided they comply with the following rules of Sharia standards:

• both parties must have the currency to be exchanged for the opposite one before making the exchange;

• the units of exchanged currency must be of the same amount, even if one of them is a banknote and the other is a coin of one country;

• the currency contract must not include conditions or stipulations regarding deferral of the transfer of one or both units of exchange;

• currency transactions must not be conducted on futures and forward markets.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8)

25. Parallel purchase and sale of currency is not permitted, as it includes one of the following factors:

• there is no transfer and receipt of two purchased and sold currencies, which leads the contract to a deferred sale of currency;

• the contract for the sale of currency becomes dependent on another contract for the sale of currency;

• it leads to a bilateral compulsory obligation of both parties to exchange currency, which itself is not permitted.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8)

26. The MFC's policy, procedures, and standard contracts for conducting foreign currency transactions must be approved by the Sharia Board.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8)

Appendix 1

to the Instruction on the Procedure for Compliance with Open Currency Position Limits by Microfinance Companies

Daily Report on Open Currency Positions

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of April 22, 2020 No. 2020-P-33/24-2, December 21, 2022 No. 2022-P-12/81-7, January 22, 2025 No. 2025-P-12/2-3-(NFBU)))

FIELD

FIELD NAME

TYPE

WIDTH

DEC

Commentary

Reporting date

Conditional code of NFBU

Balance sheet account

Currency code (alphabetic)

Active balance at the end of the day in soms

Passive balance at the end of the day in soms

Active balance at the end of the day in nominal value

Passive balance at the end of the day in nominal value

Official currency rate

Total

The database must be named VALXXXDD

The first three signs XXX - MFC numbers

The fourth and fifth signs DD - processing day

FIELD - column

FIELD NAME - column name

TYPE - data type

WIDTH - number of signs

DEC - number of signs after the point

Total - total

The report must be transmitted in .dbf format.

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