Circular to Approved Intermediaries No. 2021-02 of May 31, 2021

Tunis, May 31, 2021
CIRCULAR TO APPROVED INTERMEDIARIES NO. 2021-02 OBJECT: HEDGING INSTRUMENTS AGAINST EXCHANGE RATE, INTEREST RATE AND COMMODITY PRICE RISKS.

The Governor of the Central Bank of Tunisia,
Having regard to the Exchange and Foreign Trade Code promulgated by Law No. 76-18 of January 21, 1976, consolidating and codifying the legislation governing exchange and foreign trade regulating relations between Tunisia and foreign countries, as amended by subsequent texts and notably the decree-law No. 2011-98 of October 24, 2011; Having regard to Law No. 2016-35 of April 25, 2016 fixing the status of the Central Bank of Tunisia; Having regard to Decree No. 77-608 of July 27, 1977 setting the application conditions for Law No. 76-18 above, as amended by subsequent texts and notably its Article 25; Having regard to the Exchange Opinion of the Minister of Finance regulating the placement and use of non-transferable foreign currency holdings, published in the Official Journal of the Tunisian Republic on February 5, 2008; Having regard to Circular No. 86-02 of January 22, 1986 regarding itemized statements for the purchase and sale of foreign currencies, as amended by subsequent texts; Having regard to Circular No. 86-13 of May 6, 1986 regarding the activity of non-resident banks, as amended by subsequent texts; Having regard to Circular No. 92–13 of June 10, 1992 regarding the foreign currency money market, placement and use of non-transferable foreign currencies, and refinancing in foreign currencies with the Central Bank of Tunisia, as amended by subsequent texts and notably Circular No. 2018–15 of December 26, 2018; Having regard to Circular No. 97-08 of May 9, 1997 setting rules regarding the monitoring of exchange positions; Having regard to Circular to Approved Intermediaries No. 2016-01 of February 8, 2016 regarding the foreign exchange market and hedging instruments for exchange rate and interest rate risks; Having regard to Circular No. 2018-06 of June 5, 2018 regarding capital adequacy standards; Having regard to the Compliance Control Committee Opinion No. 2021-02 dated April 21, 2021 Decides:

TITRE I
FORWARD FOREIGN EXCHANGE OPERATIONS
Article 1: Approved Intermediaries are authorized to conduct forward foreign exchange operations (foreign currency/dinar and foreign currency/foreign currency) with their clients in respect of their commercial and financial operations carried out in accordance with prevailing regulations. For forward foreign exchange (foreign currency/dinar) operations conducted with non-resident clients, the Approved Intermediary sells only dinars forward against foreign currencies, except for capital transfer and investment income operations.
Article 2: The maturity of the forward foreign exchange contract must coincide with the contractual settlement date of the underlying operation. For financial operations involving repatriation or transfer of capital and investment income, the maximum hedging period is set at 12 months. Forward foreign exchange hedging must be carried out in the contract currency. In case the contract includes an accounting currency different from the settlement currency, the forward contract must relate to the accounting currency.
Article 3: Forward foreign exchange operations may be conducted with an Approved Intermediary other than the domiciliary of the underlying operation. Only the domiciliary Approved Intermediary is authorized to proceed with settlement after verifying the regularity of the relevant operation.
Article 4: The settlement of forward hedging can only occur through direct allocation of the purchased or sold foreign currencies to the related operations. The Approved Intermediary must ensure, upon maturity of the forward contract, that the settlement to be made corresponds to the forward foreign exchange hedging.
Article 5: Beyond the initial term of the hedging contract, extensions of forward hedging must be duly justified and documented. The extension of forward hedging for financial operations involving repatriation or transfer of capital and income cannot exceed 12 months from the initial date of the hedging contract. In case of total or partial failure to settle the forward foreign exchange contract, the client must not derive any advantage.
Article 6: Approved Intermediaries are authorized to conduct forward foreign exchange operations (foreign currency/dinar and foreign currency/foreign currency) among themselves within the framework of managing their exchange positions. For forward foreign exchange operations conducted with non-resident Approved Intermediaries, the resident Approved Intermediary sells only dinars forward against foreign currencies.
Article 7: Approved Intermediaries are authorized to conduct forward foreign exchange operations (foreign currency/foreign currency) with foreign financial institutions within the framework of managing their exchange positions and in compliance with the rules provided in Title V of this circular regarding risk management rules.

TITRE II
FOREIGN EXCHANGE OPTIONS
Article 8: Approved Intermediaries are authorized to conclude foreign exchange options (foreign currency/dinar and foreign currency/foreign currency) with their clients in respect of their commercial and financial operations carried out in accordance with prevailing regulations. To this end, Approved Intermediaries may offer their clients, within the framework of a single commercial or financial operation, a foreign exchange purchase or sale option, a combination of foreign exchange options, or a combination of foreign exchange options and forward foreign exchange contracts. For foreign currency/dinar foreign exchange options quoted in favor of non-resident clients, the Approved Intermediary sells only dinars against foreign currencies, except for capital transfer and investment income operations.
Article 9: The authorized foreign exchange options are European-style "vanilla" options.
Article 10: The maturity of the foreign exchange option must coincide with the contractual settlement date of the underlying operation. For repatriation or capital and income transfer operations, the maximum duration of the foreign exchange option is 12 months. The foreign exchange option must relate to the contract currency. In case the contract includes an accounting currency different from the settlement currency, the foreign exchange option must relate to the accounting currency.
Article 11: The exercise price of the foreign exchange option as well as the premium are freely negotiated between the Approved Intermediary and its client.
Article 12: The exercise of the option can only occur at the agreed maturity. To this end, the holder of the foreign exchange option must notify their counterparty of their decision to exercise the option two business days before the maturity date, at 11:00 local time at the latest.
Article 13: The payment of premiums for foreign exchange options concluded with resident clients must be made in dinars two business days after the date of conclusion of the option contract.
Article 14: The settlement of an exercised foreign exchange option contract follows the usual purchase or sale procedure for foreign currencies.
Article 15: The settlement of a foreign exchange option contract can only occur through direct allocation of the purchased or sold foreign currencies to the underlying operations.
Article 16: Foreign exchange option operations may be conducted with an Approved Intermediary other than the domiciliary of the underlying operation. In case of exercise of the option, only the domiciliary Approved Intermediary is authorized to proceed with settlement after verifying the regularity of the relevant operation.
Article 17: Approved Intermediaries may trade foreign exchange options (foreign currency/dinar and foreign currency/foreign currency) among themselves within the framework of managing their exchange positions. For foreign currency/dinar foreign exchange options quoted in favor of non-resident Approved Intermediaries, the resident Approved Intermediary sells only dinars against foreign currencies.
Article 18: Approved Intermediaries are authorized to trade with foreign financial institutions foreign exchange options (foreign currency/foreign currency) within the framework of managing their exchange positions and in compliance with the rules provided in Title V of this circular regarding risk management rules.

TITRE III
SWAP OPERATIONS
CHAPITRE 1: FOREIGN EXCHANGE SWAPS
Article 19: Approved Intermediaries are authorized to conduct foreign exchange swap operations (foreign currency/dinar and foreign currency/foreign currency) with their clients. Foreign exchange swaps in which the resident client purchases spot and sells forward foreign currencies against dinars must be backed by operations conducted with foreign entities in accordance with prevailing regulations. These swaps may be conducted with an Approved Intermediary other than the domiciliary of the underlying operation. For foreign currency/dinar foreign exchange swaps conducted with non-resident clients, the Approved Intermediary purchases only spot and sells forward dinars.
Article 20: Approved Intermediaries are authorized to conduct foreign exchange swap operations (foreign currency/dinar and foreign currency/foreign currency) among themselves. For foreign currency/dinar foreign exchange swaps conducted with non-resident Approved Intermediaries, the resident Approved Intermediary purchases only spot and sells forward dinars.
Article 21: Approved Intermediaries are authorized to conduct foreign exchange swap operations (foreign currency/dinar and foreign currency/foreign currency) with foreign financial institutions, in compliance with the rules provided in Title V of this circular regarding risk management rules. For foreign currency/dinar foreign exchange swap operations conducted with foreign financial institutions, the Approved Intermediary purchases only spot and sells forward dinars.

CHAPITRE 2: INTEREST RATE SWAPS
Article 22: Approved Intermediaries are authorized to conduct "vanilla" interest rate swap (IRS) operations with their clients in respect of their financial operations in dinars and foreign currencies carried out in accordance with prevailing regulations.
Article 23: The schedule of the interest rate swap contract must coincide with the contractual settlement dates of the underlying operation.
Article 24: Interest flows are exchanged on the dates stipulated by the contract. Both counterparties may agree to exchange only the net sum of interest due from each side.
Article 25: Approved Intermediaries are authorized to conduct interest rate swap operations among themselves and with foreign financial institutions to hedge against the interest rate risk incurred on the portfolio of interest rate swaps conducted with their clients, in compliance with the rules provided in Title V of this circular regarding risk management rules.
Article 26: The interest rate swap may be closed before its final maturity, totally or partially, according to international practices.

CHAPITRE 3: CURRENCY SWAPS
Article 27: Approved Intermediaries are authorized to conduct "vanilla" currency swap (CCS) operations (foreign currency/dinar and foreign currency/foreign currency) with their clients in respect of their financial operations in foreign currencies carried out in accordance with prevailing regulations. For foreign currency/dinar foreign exchange swaps conducted with non-resident clients, the Approved Intermediary sells only dinars against foreign currencies, except for capital transfer and investment income operations.
Article 28: The schedule of the currency swap contract must coincide with the contractual settlement dates of the underlying operation.
Article 29: Approved Intermediaries are authorized to conduct currency swaps among themselves in the form of foreign currency/dinar and foreign currency/foreign currency to hedge against the exchange risk incurred on the portfolio of currency swaps conducted with their clients.
Article 30: Approved Intermediaries are authorized to conduct currency swap operations with foreign financial institutions in the form of foreign currency/foreign currency to hedge against the exchange risk incurred on the portfolio of currency swaps conducted with their clients, in compliance with the rules provided in Title V of this circular regarding risk management rules.
Article 31: The currency swap may be closed before its final maturity, totally or partially, according to international practices.

CHAPITRE 4: INTEREST RATE GUARANTEE AGREEMENTS
Article 32: Approved Intermediaries are authorized to conduct "Forward Rate Agreement (FRA)" operations on dinars and foreign currencies with their clients in respect of their financial operations carried out in accordance with prevailing regulations.
Article 33: The hedging schedule must coincide with the contractual settlement date of the underlying operation.
Article 34: Approved Intermediaries are authorized to conduct interest rate guarantee agreement operations among themselves and with foreign financial institutions to hedge against the interest rate risk incurred on the portfolio of FRAs conducted with their clients, in compliance with the rules provided in Title V of this circular regarding risk management rules.

TITRE IV
HEDGING INSTRUMENTS AGAINST COMMODITY PRICE FLUCTUATION RISK
Article 35: Approved Intermediaries are authorized to conduct, in favor of their clients, hedging operations against commodity price fluctuations with foreign financial institutions or on organized international markets, in compliance with the rules provided in Title V of this circular regarding risk management rules.
Article 36: The authorized hedging instruments are standard "vanilla" instruments on the over-the-counter market, including those whose settlement depends on the average price of the underlying asset over a given period, and instruments traded on organized international markets.
Article 37: Hedging contracts must relate to inputs and/or outputs in the form of commodities relevant to the economic operator's operating cycle. The economic operator may benefit from a hedging program over several accounting years.
Article 38: Hedging requests against commodity price fluctuations submitted by economic operators to Approved Intermediaries must be accompanied by the requester's hedging policy, prepared based on the recommendations annexed to this circular (Annex 6). The hedging policy must be validated by the board of directors or a comparable management body on an annual basis. In the absence of submission of the "hedging policy" document by the requester, the Approved Intermediary is required to refrain from putting in place the hedging.
Article 39: Hedging against commodity price fluctuations may be closed before its final maturity, partially or totally, according to international practices.

TITRE V
RISK MANAGEMENT RULES
Article 40: Approved Intermediaries are authorized to open dedicated accounts for hedging operations against exchange rate, interest rate and commodity price risks with foreign financial institutions. Balances in these accounts must be justified by the needs of hedging operations, notably margin deposits and margin calls.
Article 41: Approved Intermediaries are required to have the appropriate physical organization, adequate information systems, risk analysis and monitoring tools as well as necessary human resources to manage hedging operations against market risks.
Article 42: Approved Intermediaries are required to perform daily valuation of portfolios of interest rate swaps, currency swaps and interest rate guarantee agreements. Valuation must be carried out according to international practices using reference interest rates and exchange rates on the market, namely the TUNIBOR curve published by the Central Bank of Tunisia, the Tunisian Treasury bond interest rate curve published by Tunisie Clearing, and the reference exchange rates of the dinar published by the Central Bank of Tunisia (average of buying and selling rates as displayed by the Central Bank of Tunisia on electronic information systems from 16:00 - 11:00 during the single trading session). The overall position of each hedging instrument portfolio is determined on a net basis.
Article 43: Approved Intermediaries are required to integrate the results of daily valuation of portfolios of foreign currency interest rate swaps, currency swaps and foreign currency interest rate guarantee agreements into the overall net foreign exchange position, in accordance with Article 32 of Central Bank of Tunisia Circular No. 2018-06 of June 5, 2018 regarding capital adequacy standards.
Article 44: Approved Intermediaries are required to integrate the net delta equivalent of the options portfolio for each currency into the overall net foreign exchange position, in accordance with Article 41 of Central Bank of Tunisia Circular No. 2018-06 of June 5, 2018 regarding capital adequacy standards. The net delta equivalent of an options portfolio for a given currency corresponds to the sum of the products of individual option deltas by their notionals.
Article 45: Approved Intermediaries are required to sign with their clients a standard "ISDA" or similar framework agreement governing their activity on hedging instruments.
Article 46: Approved Intermediaries are required to define credit risk limits for each client per hedging instrument and across all hedging instruments combined. The determination and updating of risk limits per client must take into account objective criteria for assessing credit risk in accordance with international best practices.
Article 47: Financial institutions eligible for hedging operations with Approved Intermediaries must have at least one long-term rating from one of the three major international rating agencies (Standard & Poor’s, Moody’s, Fitch Ratings). This rating must be at least A- (S&P) or an equivalent rating. For hedging commodity prices with non-financial entities specialized in hedging, Approved Intermediaries must require counterparty risk collateral in a guarantee account managed by an international depository (international clearing company).
Article 48: Approved Intermediaries are required to inform the Central Bank of Tunisia without delay of any hedging request of a speculative nature.

TITRE VI
COMMUNICATION TO THE CENTRAL BANK OF TUNISIA
Article 49: All communications of documents or information provided by this circular must be addressed to the General Directorate responsible for foreign exchange market operations at the Central Bank of Tunisia.
Article 50: Approved Intermediaries will submit to the Central Bank of Tunisia via the Data Exchange System (SED), in accordance with the registration templates shown in Annex 1 of this circular, controlled data related to forward foreign exchange operations, foreign exchange swaps and FRAs.
Article 51: Approved Intermediaries are required, at the end of each week, to submit by e-mail (stat.marchés@bct.gov.tn) to the Central Bank of Tunisia duly validated data by authorized managers related to the following operations:

• foreign exchange option, in accordance with Annex 2 of this circular;
• interest rate swap, in accordance with Annex 3 of this circular;
• currency swap, in accordance with Annex 4 of this circular;
• hedging against commodity price fluctuations, in accordance with Annex 5 of this circular.
  Article 52: Approved Intermediaries are required to communicate to the Central Bank of Tunisia, by swift and on a daily basis, statements of dedicated accounts for hedging operations.
  Article 53: All provisions contrary to or duplicating this text are hereby repealed, and notably:
• Circular No. 2016-01 of February 8, 2016 regarding the foreign exchange market and hedging instruments for exchange rate and interest rate risks;
• Circular No. 1992–13 of June 10, 1992 regarding the foreign currency money market, placement and use of non-transferable foreign currencies, and refinancing in foreign currencies with the Central Bank of Tunisia, as amended by subsequent texts, and notably Circular No. 2012–07 of June 15, 2012 and Circular No. 2018–15 of December 26, 2018.
  Article 54: This circular enters into force upon its notification.
  The Governor
  Marouane EL ABASSI

ANNEXE 1 A LA CIRCULAIRE AUX I.A.
N° 2021-02 DU 31 mai 2021
REGISTRATION TEMPLATE FOR FORWARD FOREIGN EXCHANGE OPERATIONS, FOREIGN EXCHANGE SWAPS AND FRAs

Ref.	Designation	Length (Characters)	Type*1	Definitions and Observations
1	Operation date (day of transaction)	8	N	Date of operation or contract conclusion in DDMMYYYY format.
2	Contracting bank code	3	N	To be indicated according to BCT bank directories.
3	Registration code	1	A	Indicate: 'S' for SWAP operation registration; 'F' for "FRA" operation registration; 'T' for forward operation registration.
4	Sequence number	4	N	Sequential number of the operation.
5	Purchase or sale code	1	A	- For forward operations indicate 'A' for purchases or 'V' for sales.

• For SWAP operations indicate 'A' for spot purchase of the currency or 'V' for spot sale of the currency.
• For FRA operations indicate 'A' for purchase of FRA or 'V' for sale of FRA. |
  | 6 | Currency code | 3 | AN | To be indicated according to BCT currency codification directory. |
  | --- | --- | --- | --- | --- |
  | 7 | Counterparty currency code | 3 | AN | To be indicated according to BCT currency codification directory. |
  | 8 | Amount purchased or sold | 15 | N | - For forward operations indicate the foreign currency amount of the purchase or sale. |
• For SWAP operations indicate the foreign currency amount of the spot purchase or sale.
• For FRA operations indicate the notional foreign currency amount to be hedged. |
  | 9 | Forward rate applied* | 10 | N | Indicate the applied conversion rate. |
  | --- | --- | --- | --- | --- |
  | 10 | Client customs code | 7 | AN | Indicate the client's customs code according to the operators codification directory. |
  | 11 | Client type | 2 | A | RE= Resident; NR= Non-Resident IB= Interbank. |

• AN = Alphanumeric N = Numeric A = Alphabetic
  This amount represents the nominal value for FRAs.