Board Resolution No. 119/2014 Approving the Regulation for the Administration of International Reserves

BOARD RESOLUTION NO. 119/2014

SUBJECT: INTERNATIONAL OPERATIONS MANAGEMENT — APPROVES THE REGULATION FOR THE ADMINISTRATION OF INTERNATIONAL RESERVES.

HAVING SEEN:

The Political Constitution of the State approved by referendum on January 25, 2009, and published on February 7, 2009.

Law No. 1670 of October 31, 1995, of the Central Bank of Bolivia (BCB).

The Statute of the BCB approved by Board Resolution No. 128/2005 of October 21, 2005, and its subsequent modifications.

The Regulation for the Administration of International Reserves approved by Board Resolution No. 075/2012 of June 26, 2012.

Board Resolutions Nos. 156/2012, 057/2013, and 027/2014 of August 28, 2012, June 4, 2013, and March 25, 2014, respectively, which modify the Regulation for the Administration of International Reserves.

The Report from the International Operations Management BCB-GOI-SRES-DNI-INF-2014-28 of September 3, 2014.

The Report from the Legal Affairs Management BCB-GAL-SANO-INF-2014-376 of September 5, 2014.

CONSIDERING:

That the Political Constitution of the State establishes in its article 328 that it is the responsibility of the BCB, in coordination with the economic policy determined by the Executive Branch, in addition to those specified by Law, to administer international reserves.

That in accordance with what is provided in article 16 of Law No. 1670, the Central Bank of Bolivia has the function of administering and managing International Reserves, being able to invest them and deposit them in custody, as well as dispose of and pledge them, in the manner it considers most appropriate for the fulfillment of its object and functions and for their adequate safeguarding and security.

That within the framework of the aforementioned, the Issuing Entity has approved through Board Resolution No. 075/2012 the Regulation for the Administration of International Reserves, establishing the policies and norms for their correct administration.

That the Report from the International Operations Management BCB-GOI-SRES-DNI-INF-2014-28 recommends approving a new Regulation for the Administration of International Reserves in order to optimize the management and diversification of said reserves.

That the Report from the Legal Affairs Management BCB-GAL-SANO-INF-2014-376 concludes that the project of the new Regulation for the Administration of International Reserves proposed by the GOI is legally procedent, since it does not contravene the current legal framework, being the competence of the BCB Board to consider its approval.

That, the BCB Board in its capacity as the highest authority of the Institution, is responsible for defining its policies, specialized regulations of general application, and internal norms, being authorized to issue norms and adopt general decisions that may be necessary for the fulfillment of the functions, competencies, and powers assigned by Law to the Issuing Entity, as established in articles 44 and 54 item o) of Law No. 1670 and articles 9, 11, and 24 of the BCB Statute.

THEREFORE,

THE BOARD OF DIRECTORS OF THE CENTRAL BANK OF BOLIVIA

RESOLVES:

Article 1.- Approve the new Regulation for the Administration of International Reserves, which, as an annex, forms an integral part of this Resolution.

Article 2.- Repeal Board Resolutions No. 075/2012, 156/2012, 057/2013, and 027/2014 of June 26, 2012, August 28, 2012, June 4, 2013, and March 25, 2014, respectively, and all provisions contrary to this Regulation.

Article 3.- The Presidency and the General Management are charged with the execution and compliance of this Resolution.

La Paz, September 16, 2014

[Signatures]

Article 4.- (Execution of Investments)

ANNEX

REGULATION FOR THE ADMINISTRATION OF INTERNATIONAL RESERVES

CHAPTER I
GENERAL PROVISIONS

Article 1.- (Object)
The purpose of this Regulation is to establish the policies and norms for the administration of the international reserves of the Central Bank of Bolivia (BCB).

Article 2.- (Investment Criteria)
The BCB's international reserves are invested with criteria of security, capital preservation, liquidity, diversification, and profitability, in that order of priority.

Article 3.- (International Reserves Committee)
I. The International Reserves Committee, constituted in accordance with the BCB Statute, meets at least once a month to evaluate investments made by the International Operations Management and by delegated administrators.
II. Before the start of each quarter, it determines the minimum and maximum levels of the Precautionary Tranche, Working Capital, and the Investment Tranche portfolios. If necessary, it may modify these decisions within the same quarter.
III. It defines the treatment to be applied to investments whose credit risk rating decreases to a level below the minimum required in article 15 of this Regulation.
IV. It defines the treatment for cases where mergers, absorptions, or subrogations of financial entities occur in which investments are held, current accounts are maintained, or delegated administration or custody services are provided.

The International Operations Management, through the Reserves Sub-management, is responsible for the execution of international reserve investments, applying the provisions of this Regulation, presenting periodic reports to the International Reserves Committee and the BCB Board.

The Investment Control Department of the International Operations Management will carry out control over the compliance with the norms, policies, and limits established by the BCB Board in the investment of international reserves, presenting periodic reports to the International Reserves Committee.

CHAPTER II
ON INTERNATIONAL RESERVES

SECTION I
OBJECT AND STRUCTURE OF INTERNATIONAL RESERVES

Article 5.- (Object)
International reserves have the object of maintaining the normal functioning of the country's international payments and backing monetary and exchange rate policies.

Article 6.- (Structure of International Reserves)
I. International reserves are composed of international monetary reserves and gold reserves.
II. International monetary reserves are broken down into the Precautionary Tranche and the Investment Tranche.

Article 7.- (Precautionary Tranche)
I. The object of the Precautionary Tranche, constituted by Working Capital and the Liquidity Portfolio, is to cover liquidity needs to meet international payment requirements and those arising from extraordinary events.
II. Its size is determined by the optimal reserve level, and its range is determined by the International Reserves Committee.
III. The International Operations Management will calculate the optimal reserve level annually for approval by the International Reserves Committee.

Article 8.- (Working Capital)
I. The object of working capital is to meet immediate payment requirements and fund transfers abroad. It is composed of investments of up to 7 days, balances in current accounts abroad, and US dollars in cash.
II. The General Management, in coordination with the Monetary Operations Management and International Operations Management, will approve the amounts and dates for sending or receiving foreign currency in cash.

Article 9.- (Liquidity Portfolio)
I. The object of the Liquidity Portfolio is to meet liquidity requirements not covered by Working Capital.
II. The Liquidity Portfolio maintains short-term investments detailed in article 13 of this Regulation.

Article 10.- (Investment Tranche)
I. The object of the Investment Tranche is to diversify the investment of international reserves and increase their value over a long-term horizon.
II. Its size is determined by the difference between the total International Monetary Reserves and the Precautionary Tranche.
III. It is constituted by the Portfolios: Medium-term 0-3 years (Own Management), Medium-term 0-3 years (External Management), Medium-term 0-5 years, Global, and TIPS (Treasury Inflation Protected Securities). This tranche is invested in the instruments and operations indicated in article 13 of this Regulation.
IV. The Medium-term 0-5 years portfolio will hold each of its investments until maturity. The International Reserves Committee may exceptionally define sales before the maturity of an investment.

Article 11.- (Authorized Currencies)
I. Working Capital is constituted in US Dollars and, to a lesser extent, in other currencies of countries that comply with what is established in article 15 of this Regulation.
II. The currencies that make up international monetary reserves and the minimum and maximum limits of the currencies that make up the Investment Tranche will be determined by the BCB Board.

SECTION II
REFERENCE BENCHMARKS, INSTRUMENTS, AND AUTHORIZED OPERATIONS

Article 12.- (Reference Benchmarks)
The following reference benchmarks are established:

Tranche	Portfolio	Reference Benchmark (Benchmark)
Precautionary	Working Capital	LIBID Overnight average in USD
Precautionary	Liquidity Portfolio	LIBID 6 months average in USD
Investment	Medium-term 0-3 years (Own and External Management)	Merrill Lynch US Treasuries index 0 to 3 years
Investment	Medium-term 0-5 years	MTI Titles BIS 0-5 years
Investment	TIPS	Barclays Capital US Govt. Inflation-linked Bond Index, 1-10 years
Investment	Global (1)	Merrill Lynch French Treasury Bills index up to 1 year in EUR, FIXBIS 6 months in AUD, FIXBIS 6 months in CAD, and deposit index at 6 months in CNH

(1) The weight of each index in the benchmark will be a function of the average balance of each Portfolio.

Article 13.- (Authorized Instruments and Operations)
The authorized instruments and operations for the Investment Capital are:

• Overnight Deposits
• Securities Lending
• Purchase and sale of currencies

With a maximum maturity of 1 year:

• Commercial Paper
• Certificates of Deposit
• Time Deposits

With a maximum maturity of 10 years:

• Titles issued by governments
• Titles issued by agencies
• Titles issued by supranational organizations
• Floating Rate Notes
• Interest rate futures contracts
• Investment funds of the Bank for International Settlements

With a maturity up to 30 years:

• Treasury Inflation Protected Securities (TIPS)

CHAPTER III
ON GOLD RESERVES

Article 14.- (Gold Reserves)
I. Gold reserves are constituted by investments in time deposits, bonds denominated in gold, balances in allocated (physically) or unallocated (book entry) accounts, and gold bars that possess the quality of London Good Delivery Bars.
II. Investments may be made in countries with a long-term sovereign credit risk rating of AA-, at the Bank for International Settlements (BIS), the World Bank (WB), and in financial entities that are members of the London Bullion Market Association with a long-term rating equal to or greater than A and a short-term rating equal to or greater than A1.
III. The limit for gold bar investment abroad is 100%, and the amount of gold bars purchased locally, which may remain in the BCB vault, will be up to 500 kilos.
IV. Investments in gold by issuer must not exceed 40% of the portfolio value, excluding the BIS and the WB.
V. The purchase of gold required to complete London Good Delivery Bars, resulting from the refining of locally purchased gold, is authorized.

CHAPTER IV
GLOBAL RISK POLICY

Article 15.- (Credit Risk)
I. The country where investments are made and the country of the headquarters of the institutions in which international monetary reserves are invested or with which intermediation is carried out, must have a long-term sovereign credit risk rating equal to or greater than A.
II. The investment of international reserves is made with issuers that have a short-term rating equal to or greater than F-1 and a long-term rating equal to or greater than A.
III. Investments are made in non-subordinated debt titles and without any component associated with the equity market.
IV. Investments of international reserves may be made in the BIS.
V. The maximum expected credit loss, measured by Value at Risk (VaR), is 1% for the Precautionary Tranche and 0.8% for the Investment Tranche, with a confidence level of 99.9%.

Article 16.- (Market Risk)
I. The maximum investment term per instrument in the Liquidity Portfolio is 1 year.
II. For the portfolios of the Investment Tranche, the duration range is +/- 0.6 years with respect to the duration of its reference benchmark, the margin duration is less than or equal to 2 years, and convexity is greater than -0.5.
III. Active risk exposure for the Medium-term 0-3 years portfolios (Own and External Management) and Global is equivalent to an ex ante tracking error less than or equal to 100 basis points, measured against their reference benchmarks.

Article 17.- (Concentration Risk)
The limits by concentration on the total international monetary reserves are:

Sector/Issuer	Total International Monetary Reserves
By Agency	15%
By Supranational	15%
By Banking Issuer	5%

CHAPTER V
DELEGATED ADMINISTRATION AND CUSTODY OF SECURITIES

Article 18.- (Delegated Administration)
I. The delegated administration of international monetary reserves is carried out through international organizations, financial institutions, or fund managers.
II. The BCB Board, through an express Resolution, will approve the investment guidelines for delegated administration, for subsequent contracting in accordance with what is provided by the specific regulation for the contracting of these services.
III. The total delegated amount must not exceed 15% of international monetary reserves.
IV. The amount delegated per institution must not exceed 5% of international monetary reserves.

Article 19.- (Custody)
The custody services for international reserve investments are carried out at the BIS and in banks or financial institutions that have a long-term issuer credit risk rating equal to or greater than A, and that comply with what is provided in article 15 of this Regulation.

CHAPTER VI
COMMON PROVISIONS

Article 20.- (Investment Performance)
The performance of the BCB's international reserves will be evaluated with reference to the currency invested in each portfolio.

Article 21.- (Prohibitions)
Investments in agencies of banks or financial institutions classified as "Offshore" are prohibited.

Article 22.- (Intermediaries)
The purchase and sale of titles and currencies will be carried out with primary dealers, eligible financial institutions, or institutions registered in the Stock Exchanges of the countries defined in article 15 of this Regulation.

Article 23.- (Credit Risk Rating Agency)
The credit risk ratings mentioned in this Regulation correspond to Fitch Information Inc. In the event that ratings from another Credit Rating Agency are used, the ratings equivalent to Fitch Information Inc. will be taken into account.