Instruction on the Procedure for Compliance with Open Currency Position Limits by Credit Unions

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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. 24/9

INSTRUCTION on the procedure for compliance with open currency position limits by credit unions

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8, June 15, 2017 No. 2017-P-12/25-12, 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-(NFKU))

1. General Provisions

2. This Instruction is developed for the purpose of preventing currency risks in the activities of credit unions (hereinafter referred to as CUs), including those conducting operations in accordance with Islamic principles of banking and financing, taking into account the requirements of Sharia standards and special terminology applied by them in carrying out banking operations as a result of operations to attract deposits (deposits) from CU participants in foreign currency, and providing CU participants with loans on terms of maturity, repayability, and cost in foreign currency, provided the CU has a license issued by the National Bank to carry out additional services (operations) in foreign currency.

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of September 16, 2015 No. 53/8, June 15, 2017 No. 2017-P-12/25-12)

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

CUs conducting operations in accordance with Islamic principles of banking and financing must additionally be guided by 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 a CU incurring losses due to changes in the value of the CU's claims (assets)/obligations denominated in foreign currency, in the event of an unfavorable change in the exchange rate, at the time when the CU has an open currency position in that currency. A currency position arises from the conduct of currency operations and is an indicator of the degree of the CU's exposure to currency risk.

Currency operations are operations by a CU to issue loans to its participants in foreign currency and to accept deposits (deposits) from its participants in foreign currency, as well as other operations resulting in changes to claims (assets) or obligations denominated in foreign currency.

Net currency position is the difference between the claims (assets) and obligations of a CU in each separate foreign currency.

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

An open currency position of a CU can be long (in the case where the CU's claims (assets) in the relevant currency exceed its obligations in the same currency) or short (when obligations exceed 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 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 a CU for each foreign currency, calculated using the "short hand" method as determined in paragraph 9 of this Instruction.

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

Transaction date is the date when the parties reach an agreement on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, settlement date, etc.).

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

2. Procedure for Calculating Open Currency Positions

3. As of the end of each business day, a CU 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 net spot position in that foreign currency. This value is calculated as the difference between balance sheet assets and balance sheet liabilities, including accrued interest income/expenses in that foreign currency. Assets and liabilities are included in the calculation at their net book value.

6. Off-balance sheet obligations are not included in the currency position calculation.

7. Currency operations are included in the currency position calculation from the transaction date and their reflection in the balance sheet, including operations containing a future settlement date that is not the transaction date.

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

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

10. Open Currency Position Limits

11. For the purpose of regulating currency risk, the National Bank establishes the following open currency position limits for CUs:

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

• for currencies whose official rates are determined by the National Bank - 15% of the total capital of the CU, calculated as of the 1st day of the reporting month;
• for currencies whose official rates are not determined by the National Bank, the net currency position must be closed;

2. as of the end of the business day, the size of the aggregate currency position for all foreign currencies whose official rates are determined by the National Bank must not exceed 20% of the total capital of the CU, calculated as of the 1st day of the reporting month.

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

12. Exceedances of the established open currency position limits cannot be carried over by CUs to the next business day. By the end of the current business day, 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 monitored independently by the CU, based on its own assessment of the permissible level of currency risk. At the same time, each CU must keep currency risk levels within the day in accordance with the internal currency risk management policy approved by the General Meeting of the Credit Union.

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

15. Report on Open Currency Positions and Procedure for Submission

16. CUs must submit to the National Bank daily by 9:00 AM, 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 report on open currency positions for the reporting week as of the end of each business day of the reporting week according to the Appendix to this Instruction.

CUs conducting operations in accordance with Islamic principles of banking and financing within the "Islamic window" must submit to the National Bank daily by 9:00 AM, 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 CU operations in foreign currency.

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

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

17. Measures of Impact for Violation of Established Open Currency Position Limits

(Name of chapter as amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-12)

17. In the event of a CU violating the established open currency position limits, the National Bank applies measures of impact in the form of collecting a monetary fine from the CU in the amount of 5 (five) percent of the excess amount of the open currency position limit, but not more than 10 (ten) percent of the book value of the CU's assets in accordance with the Regulation "On Measures of Impact Applied to Non-Bank Financial and Credit Organizations and Other Legal Entities Subject to 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.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of December 23, 2020 No. 2020-P-33/73-13)

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

19. Any attempts by a CU to avoid reflecting the real currency position in the report in any way are considered as:

• attempts to mislead the National Bank;
• unsafe or unreliable financial activity;
• manipulation of the currency position with the purpose of distorting its real value, i.e., conducting dubious operations, the origin and execution of which cannot be clearly identified and/or, if these operations affect the financial reporting of the CU and its economic indicators;
• provision of unreliable financial and regulatory reporting by the CU.

In the event of unreliable reflection of the currency position, measures of impact will be applied to the CU, up to the revocation of the license.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-12)

20. In the event of a violation of any of the requirements of this Instruction, the management of the CU is obliged to immediately inform the National Bank of the violations committed and submit written explanations regarding the causes of the violation within two days, accompanied by a list of measures taken by the CU to eliminate it.

21. Organization of Internal Control for Foreign Currency Operations

22. To conduct foreign currency operations, CUs must develop an internal currency risk management policy and organize adequate internal control.

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

• separation of functional responsibilities of CU employees so that one employee cannot perform and/or control any process in full from the initiation of the transaction to its recording in accounting books;
• clear order for authorizing the volume of conducted operations by corresponding authorized CU employees;
• internal limits for 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 operations performed and the category of the counterparty;
• requirements for the audit committee/external (independent) audit when conducting checks of currency operations (at least, the independence of members of the audit committee/external auditors and their having the necessary qualifications and knowledge);
• requirements for accounting and reporting on currency operations for the CU and its branches (form, frequency of submission, responsibility).

7. Features of Currency Operations of a CU 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)

23. A CU has the right to conduct transactions for the purchase and sale of foreign currency provided they comply with the following Sharia standards rules:

• both parties must have the currency to be exchanged for the opposite currency available before making the exchange;
• the units of exchanged currency must be of equal value, even if one is a banknote and the other is a coin of the same country;
• the currency contract must not include conditions or stipulations regarding deferral of the transfer of one or both units of exchange;
• currency operations 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)

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

• absence of 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;
• leads to a bilateral mandatory 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)

25. The CU's policies, procedures, and standard contracts for conducting foreign currency operations 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 to the Instruction "On the Procedure for Compliance with Open Currency Position Limits by Credit Unions"

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-(NFKU))

FIELD

FIELD NAME

TYPE

WIDTH

DEC

Comment

1

Reporting Date

2

Conditional Code of NFKO

3

Balance Sheet Account

4

Currency Code (Alphabetic)

5

Active Balance at End of Day in Som

6

Passive Balance at End of Day in Som

7

Active Balance at End of Day in Nominal

8

Passive Balance at End of Day in Nominal

9

Official Currency Rate

Total

The database must be named VALXXXXX

The first three X's are the CU number

The fourth and fifth characters DD - processing day

FIELD - column

FIELD NAME - column name

TYPE - data type

WIDTH - number of characters

DEC - number of digits after the point

Total - total

The report must be transmitted in .dbf format.

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