Central Bank of Jordan Memorandum No. 2000/179 on Foreign Currency Asset/Liability Management

Management of Banks' Foreign Currency Assets/Liabilities Memorandum No. (2000/179) dated 2000/7/5

In light of the Central Bank's policy aimed at unifying the regulatory framework and ensuring the safety of the banking system.

To specify the conditions for the management of foreign currency assets by licensed banks in a manner that contributes to preserving the value of these assets and generating an appropriate return, thereby maintaining an appropriate balance between profitability and liquidity, and to enhance the Central Bank's ability to develop the Jordanian capital market by providing banks with the necessary capabilities and skills of global financial markets.

This memorandum aims to grant banks the freedom to invest within the regulatory framework, enabling banks to utilize their foreign currency assets in a manner that may include domestic markets or capital markets. This memorandum provides freedom of investment between markets and assets, subject to the investment options available to banks and the standards included in this memorandum.

For the purpose of defining investment policies, the following rules shall apply:

First: Domestic Money Market Investments: The domestic money market assets include deposits, treasury bills, commercial papers, certified certificates of deposit, and repurchase agreements with a maturity of one year or less. For the purposes of this memorandum, the maturity of bonds is considered one year, consistent with the treatment of domestic money market assets.

a) Banks may invest up to 40% of their total foreign currency capital (excluding deposits with the Central Bank) in domestic money market assets with banks or financial institutions meeting at least one of the following ratings:

1. P & S rating of A- or higher.
2. Moodys rating of A3 or higher.
3. FITCH rating of A or higher.
4. Thomson Bank Watch rating of B or higher.

b) The ratings mentioned in paragraph (a) must be issued by a recognized rating agency. c) The following are excluded from the mentioned ratings:

1. Deposits or investments by banks with their branches, subsidiaries, or affiliated financial institutions in the same country, whether through direct, indirect, or apparent ownership, or with parent or affiliated non-financial companies or Jordanian banks, regardless of the rating of the related entity. These deposits/investments must not exceed 50% of their total domestic money market investments.
2. 10% (ten percent) of the funds invested in domestic money market assets with banks or financial institutions that are not rated or do not meet the ratings mentioned in paragraph (a) of this section.
3. Deposits or investments by banks with Jordanian banks.
4. Interbank foreign currency deposits/lending in the Jordanian interbank market.
5. Bank deposits in their accounts with their correspondents in the same country (including current, demand, and savings accounts/deposits and other deposits) used for settling their foreign operational transactions or to meet requests/orders from their parent companies.
6. Domestic money market assets issued by the Jordanian government or its entities (including those established by it) or by Jordanian non-bank companies, provided these assets are issued within or outside the Kingdom.

d) The total investments by banks with correspondent banks (whether local or foreign) must not exceed 10% of their total foreign currency capital (excluding domestic deposits).

Second: Capital Market Investments: Investments in bonds, collective investment certificates, other debt instruments, and shares in profitable companies or investment funds are permitted.

a) Banks may invest up to 30% of their total capital (excluding deposits with the Central Bank) in foreign currency-denominated bonds with a maturity of at least two years from their issuance date, provided they are rated by a recognized agency with at least one of the following ratings:

1. P & S rating of A- or higher.
2. Moodys rating of A3 or higher.
3. FITCH rating of A or higher.
4. Thomson Bank Watch rating of B or higher. Excluded from these ratings are foreign currency-denominated bonds issued by the Jordanian government, its entities, or Jordanian companies, provided these bonds are issued within or outside the Kingdom.

b) Banks may invest between 20% and 30% of the percentage mentioned in paragraph (a) of this section in bonds, other debt instruments, or collective investment certificates (with a duration of at least five years from their issuance date) that are not rated or do not meet the ratings mentioned in paragraph (a) of this section.

c) Banks may invest between 15% and 30% of the percentage mentioned in paragraph (a) of this section in blue-chip shares (Chips-Blue), recognized stock indices by P & S or others, or shares in active investment companies or investment funds whose main activity is investing in capital markets, provided the total bank investments in these assets or total holdings do not exceed the percentage approved by the Central Bank.

Third: Foreign Currency Facilities within the Kingdom: Banks may grant foreign currency financing facilities within the Kingdom up to 30% of their total foreign currency capital (excluding domestic deposits with the Central Bank), provided these facilities are granted to national private entities earning foreign currency within the Kingdom and are within the permissible ratio for correspondent lending.

Fourth: Islamic Banks: a) Islamic banks may provide foreign currency financing to national private entities earning foreign currency within the Kingdom up to 30% of their total foreign currency capital (excluding domestic deposits with the Central Bank and excluding foreign currency-denominated investment deposits).

b) Islamic banks may utilize the liabilities from their foreign currency capital (as defined in paragraph (a) of this section) for the following:

1. Up to 40% of the liabilities may be invested in investment instruments through a bank or financial institution (third-party exchange rate) with a rating of at least one of the following:
   • P & S rating of A- or higher.
   • Moodys rating of A3 or higher.
   • FITCH rating of A or higher.
   • Thomson Bank Watch rating of B or higher.
2. Up to 60% of the liabilities may be invested in investment instruments with recognized Islamic institutions/banks/companies verified for financial soundness.
3. Between 20% and 30% of the liabilities may be invested in shares of blue-chip companies, investment funds, or active investment companies as mentioned in paragraph (b) of section fourth.

c) Islamic banks must conduct appropriate due diligence on the institutions/banks/companies mentioned in paragraph (b) of section fourth, based on a sample of transactions, and notify the Central Bank of these due diligence results.

Fifth: The provisions of this memorandum regarding facilities and financing to private entities and investments shall apply to the provisions of the Companies Law.

Sixth: Overnight Foreign Currency Positions:

1. Licensed banks may hold overnight (short-term) positions in major foreign currencies against each other up to 5% of shareholders' equity for each currency (excluding the base currency, which can be treated as a single currency), provided the total aggregate positions for all currencies do not exceed 15% of the bank's total shareholders' equity.
2. Shareholders' equity for the purposes of this memorandum is defined as: a) Paid-up/Capitalized capital. b) Legal reserves. c) Other reserves. d) Retained earnings. e) Reported profits/losses.
3. Banks must establish internal instructions for daily and non-daily positions and their coverage methods, notifying the Central Bank of these instructions.

Seventh: Traded Financial Instruments (Derivatives):

1. Licensed banks may trade derivatives markets (Options, Futures, etc.) solely for hedging investment risks arising from exchange rate and/or interest rate requirements.
2. Banks may trade these financial instruments for trading purposes in currency and precious metals markets (Trading) or shares and indices, provided the total unrealized losses during the financial year do not exceed 2% of total shareholders' equity (i.e., the sum of premiums and other banks' option rights) as defined in paragraph (2) of section sixth.
3. Banks must avoid writing options unless they have a hedging instrument (Underlying Instrument). Selling call options is prohibited unless the underlying asset is sold simultaneously.
4. If a bank's unrealized losses exceed the percentage mentioned in paragraph (2) of this section, the bank must immediately cease trading derivatives until the Central Bank issues a written permit after reviewing the bank's accounts and providing a reasonable period to address the issue. The bank must resume trading only upon obtaining a written permit from the Central Bank.

Eighth: Reporting to the Central Bank:

1. Banks must submit their annual investment/investment policy, approved by their Board of Directors, to the Central Bank annually, ensuring the policy includes: a) The bank's investment objectives. b) Definition of permitted investment assets and their credit ratings. c) Geographic distribution of investments. d) Duration of debt instruments where applicable. e) Maturities of permitted debt instruments where applicable. f) The authorized person for trading/investment. g) Value at Risk (VaR), defined as the maximum expected loss over a specific period. h) Liquidity Gap between foreign currency funding maturities (deposits and other funds excluding capital) and investment maturities. i) Any other information or data requested by the Central Bank.
2. Banks must submit daily and monthly reports on investments/investments mentioned in this memorandum using forms requested by the Central Bank. Banks must submit these reports using the Central Bank's required forms. These reports must include the calculation of exposed funds through Market-to-Mark valuation (using the current bid price and the market reference price).

Ninth: The Central Bank shall immediately enforce the controls mentioned in this memorandum and take actions to address violations and liquidity deficiencies. The Central Bank may, in cases of violation and considering the nature of the offense, apply penalties stipulated in the Banks Law or any orders issued by the Central Bank for this purpose.