Decision on International Reserves Management

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 1 Pursuant to Article 20 paragraph 4 and Article 44 paragraph 2 item 3 of the Central Bank of Montenegro Law (OGM 40/10, 6/13, 70/17, 125/23), the Council of the Central Bank of Montenegro, at its meeting held on 29 November 2024, passed the following DECISION ON INTERNATIONAL RESERVES MANAGEMENT
I. BASIC PROVISIONS
Article 1
This decision shall prescribe in more detail the management of international reserves of Montenegro (hereinafter: the international reserves).
Article 2
The terms used in this Decision for natural persons in masculine gender shall imply the same terms in feminine gender.
Article 3
The international reserves shall represent all receivables from non-residents that are at disposal of the Central Bank of Montenegro (hereinafter: the Central Bank). The international reserves shall be a part of the balance sheet of the Central Bank.
Article 4
The Central Bank shall hold and manage the international reserves in the manner that is consistent with the monetary policy and that ensures undisturbed fulfilment of external liabilities of Montenegro, adhering to the principles of liquidity and safety of investments.
Article 5
The international reserves may, pursuant to the law, include the following:

1. gold, precious metals and precious stones held by the Central Bank or by
   a third party for the account of the Central Bank;
2. banknotes and coins in a convertible foreign currency held by the Central
   Bank or by a third party for the account of the Central Bank;
3. credit balances payable in a convertible foreign currency that are held in
   the accounts of the Central Bank with foreign central banks, international financial institutions or credit institutions;

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4) debt securities denominated in a convertible foreign currency held by the
Central Bank or by a third party for the account of the Central Bank;
5) forward purchase or repurchase agreements entered into by the Central
Bank with or guaranteed by other central banks, credit or financial institutions with head offices outside Montenegro or international financial institutions, as well as forward and options agreements entered into by the Central Bank with parties, providing for the payment in a convertible currency;
6) special drawing rights and reserve position held in the accounts of
Montenegro with the International Monetary Fund;
7) other assets that may, by nature of their contents, be seen as equivalent
to the assets referred to in items 1) to 6) of this paragraph.
Article 6
In managing the international reserves, the Central Bank may:

• open accounts in foreign central banks, international financial
  institutions or foreign banks, and invest funds there;
• purchase and sell legal tenders other than EUR in FX markets;
• purchase and sell gold;
• purchase and sell, borrow and lend and enter into forward agreements
  related to securities;
• purchase and sell banknotes and coins;
• perform other operations necessary for managing the international
  reserves.
  Article 7
  The investment strategy for international reserves management governing the certain forms of investments, parameters for managing the international reserves and risk management shall be determined by the Guidelines on investment strategy for international reserves management (hereinafter: the Guidelines) to be adopted by the Council of the Central Bank.
  Article 8
  The Governor of the Central Bank (hereinafter: the Governor) shall establish Investment Committee as a professional and advisory body in respect to the management of international reserves. The composition and scope of work of the Investment Committee shall be governed by an act on the establishment of that committee.

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 3 II POWERS AND RESPONSIBILITIES IN INTERNATIONAL RESERVES MANAGEMENT
Article 9
For the purpose of ensuring integrity, limiting risks and more efficient control in the process of managing the international reserves, the following segregation of duties under the hierarchy organisational structure shall be established in the Central Bank:

1. The Council of the Central Bank, when determining the investment strategy
   for managing the international reserves, shall determine in particular: forms in which international reserves’ assets may be invested; level of risks the Central Bank may take in managing the international reserves; types of portfolio; elements of individual portfolios; currency structure of the portfolio and strategic benchmarks;
2. Governor, or a person authorised by them, shall provide detailed guidelines
   and instructions for assuming certain activities in managing the international reserves within the established parameters. The investment committee shall discuss the investment strategy for international reserves management within the limits approved by the Guidelines, tactical framework for international reserves management and establish the list of approved banks within the parameters as established by the Guidelines.
3. Daily activities of managing the international reserves shall be performed by
   the employees in the organisational units of the Central Bank who perform the activities concerning the management of international reserves and investment financial risks and foreign exchange transactions and establishment and maintenance of foreign correspondent relations, within the parameters defined by the Guidelines, detailed guidance and instructions of the Governor and tactical framework for international reserves management. III OBJECTIVE AND PRINCIPLES
   Article 10
   The international reserves’ assets shall be invested with a view of long-term preserving of their capital value or real purchase power, whilst ensuring relatively foreseeable cash flow. For the purpose of achieving the objective referred to in paragraph 1 of this
   Article, the international reserves’ assets shall be governed by adhering to
   liquidity and safety principles.
   The liquidity of international reserves implies availability of necessary amount of funds for timely payment of matured and outstanding foreign liabilities, whereat, for the purpose of ensuring adequate liquidity, international reserves are

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 4 reallocated among different tranches and may be converted into liquid assets in short-term. The safety of international reserves implies the preservation of their capital value and shall be achieved through adequate management of credit, market and operational risks. IV DIVISION OF INTERNATIONAL RESERVES ASSETS
Article 11
For the purpose of attaining objectives and ensuring the observance of principles of international reserves management, total assets of international reserves shall be divided, depending on the liquidity needs and investment horizon, into different types of tranches as follows: liquid, investment and special tranches. The structure and size of each tranche shall be based on the assessment of liquidity needs during different time horizons, taking into consideration adequate level of international reserves. The liquid tranche shall be used for providing daily liquidity (available funds) and liquidity up to one year, or short-term liquidity needs, whereat the level of international reserves exceeding the projected payments of government debt and contingent liquidity needs may be invested long-term. The investment tranche shall be used for providing medium-term and long-term objectives, and ultimately liquidity, if no funds exist in liquid tranche and for the purpose of covering long-term contingent liabilities in accordance with macro￾economic and financial stability of the country. The Guidelines shall determine the division of tranches to portfolios and the limits defining the size of individual portfolios in tranches. The size of the individual tranches shall be periodically reviewed, depending on the condition of total international reserves, announced inflows and outflows of funds, changes in the balance of international reserves in the last year and the structure of sources of funds. Funds with the International Monetary Fund (hereinafter: the IMF), funds that the Central Bank holds in its own accounts abroad on behalf of the clients, in accordance with the separate agreements, that are not actively managed unless otherwise prescribed by the agreement, as well as other funds not actively managed shall be kept within the special tranche.

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Article 12
The Guidelines shall determine the allowed instruments for each of the individual portfolios, maximum exposure, maturity, issuers and, depending on the type of instrument or portfolio, minimum credit rating of the bank, issuer or an issue. The banks with which the cooperation is allowed shall be determined by way of a separate list referred to in Article 9 paragraph 1 item 2 of this Decision. V RISK MANAGEMENT
Article 13
The international reserves management shall include the limiting of exposure to the following risks:

1. credit risk;
2. liquidity risk;
3. market risk, and
4. operational risk.
   Article 14
   Credit risk, within the meaning of this decision, shall be a risk of default on contractual obligations of a counterparty. Credit risk management shall include the assessment of credit capacity, the setting of appropriate limits – for both the rating level and the exposure level, an ongoing monitoring and mitigating the exposure through diversification and collateral mechanisms. The exposure to credit risk shall be controlled by defining minimum short-term and/or long-term credit rating for different types of financial institutions, issuers or financial instruments. Minimum credit rating, in the moment of negotiating the transaction, for the approved foreign banks and other issuers shall be determined as follows:

• BBB-/Baa3 long-term rating for issuers, whereat, based on the grades of
  relevant rating agencies (Moody´s, S&P, Fitch), the uniform composite rating is calculated for the purpose of unified classification;
• A-/A3 long-term rating for banks which are allowed to negotiate deposits
  and repos;
• A-3/P-3/F3 short-term rating for banks where accounts may be opened and
  with which cash, currencies and securities may be transacted, as well as payment system operations executed. Ratings of the central banks shall correspond to the ratings of their countries, while the Bank for International Settlements (BIS) and the IMF are exempted from this type of limits.

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 6 More severe exposure limits, as well as additional limits may be determined in the Guidelines. There is no limit on total exposure to funds held with central banks, while exposure limit to commercial banks and banking groups shall be more precisely defined in the Guidelines. Where the credit rating falls below the minimum rating, the Central Bank shall decide whether to keep or suspend the current placements.
Article 15
Liquidity risk, within the meaning of this Decision, shall be the risk of inability to meet short-term financial liabilities due to inability to easily convert assets into cash. In managing the international reserves, the necessary amount of liquid assets should be provided to meet requirements for undisturbed fulfilment of Montenegro’s foreign obligations, for cash for the purpose of Central Bank’s Vault and for the implementation of monetary policy instruments. Liquidity risk management shall include the maintenance of adequate cash reserves, the implementation of cash flow forecasting and liquidity contingency planning, as well as for the selection of quality securities that are highly traded in financial markets. The exposure to liquidity risk shall be controlled by allocating funds within the established types of portfolios and investments in liquid instruments with appropriate maturity.
Article 16
Market risk shall include interest rate risk and FX risk.
Interest rate risk, within the meaning of this Decision, shall be the risk of incurring financial loss due to interest rate fluctuations affecting the value of international reserves instruments. Interest rate risk management shall be achieved by setting the optimum sensitivity in pricing of debt securities to changes in interest rates. The exposure to interest rate risk shall be controlled by setting the benchmarks, determining and measuring the average duration and defining allowed deviation of that indicator as compared to the duration of the selected benchmark.

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 7 Interest rate risk shall additionally be controlled by determining maximum maturity for all types of instruments in which the investment of international reserves assets is allowed, as follows:

• for liquid tranche – up to one year, and
• for investment tranche – up to 10 years.
  FX risk, within the meaning of this Decision, shall be the risk that exposes individual instruments of international reserves to losses caused by changes in the exchange rates. FX risk management shall include the use of hedging strategies, such as forward contracts, options and currency swaps, as well as diversification of FX exposure to mitigate the impact of foreign exchange volatility. The exposure to FX risk shall be controlled at the level of total international reserves by reallocating funds within the allowed currencies in accordance with the limits set in the Guidelines. The FX risk that arises from inflows or outflows of funds denominated in foreign currency and not from identified FX diversification shall not be subject to measurement. Where the FX diversification does not envisage different reallocation of funds within the allowed currencies, the funds in all balance sheet currencies shall be invested in instruments denominated in the same currencies.
  Article 17
  Operational risk, within the meaning of this Decision, shall be the risk of incurring losses due to inadequate or failed internal processes, systems, human errors or external events. Operational risk management shall include the implementation of internal controls, risk assessments and business continuity plans, as well as ongoing monitoring and improving the processes to mitigate the impact of such risks. Operational risk shall be controlled through an adequate segregation of duties within the organisational units and employees of the Central Bank directly involved in these processes, as well as by ensuring the observance of code of ethics and adequate infrastructure and external systems of support to investment.

Official Gazette of Montenegro, No. 116/24 [Unofficial translation] Decision on International Reserves Management 8 VI REPORTING
Article 18
The Governor shall submit a report on the international reserves management to the Council of the Central Bank as needed, and at least semi-annually. VII TRANSITIONAL AND CLOSING PROVISION
Article 19
On the day this Decision enters into force, the Decision on International Reserves Management (OGM 19/11, 88/17) shall be repealed.
Article 20
This decision shall enter into force on the eighth day following that of its publication in the “Official Gazette of Montenegro”. THE COUNCIL OF THE CENTRAL BANK OF MONTENEGRO Decision number, 0101-9206-4/2024 Podgorica, 29 November 2024 CHAIRPERSON GOVERNOR Irena Radović, m.p.