Bank of Zambia Circular 14/2001 on Foreign Exchange Risk Exposures, Placements and Transactions

Bank of Zambia
P.O. Box 30080, LUSAKA
10101

Tel. 228888/228903-20

March 19, 2001

CB Circular No.: 14/2001

To: All banks and financial institutions

Dear Sir/Madam

# FOREIGN EXCHANGE RISK EXPOSURES, PLACEMENTS AND TRANSACTIONS

This circular replaces CB Circulars 6/2001 and 7/2001, and makes modifications to Circular No 08/2001.

## PART I
### FOREIGN EXCHANGE RISK EXPOSURE

With reference to Statutory Instrument Number 57 of 1996, the Banking and Financial Services (Foreign Exchange Risk Management and Exposure) Regulations, the Bank of Zambia is effecting the following measures:

**(A) Limit on overnight overall and single foreign currency risk exposure**

The overnight overall foreign exchange and single currency exposure limits have been reduced from the current 25% and 20% to 15% and 10% of regulatory capital, respectively.

**(B) Limit on intra-day overall and single foreign currency risk exposure**

Intra-day overall foreign exchange and single currency exposure limits shall be maintained within prudent limits as established by the bank’s or financial institution’s board of directors in a written policy covering its foreign exchange risk management plan:

Provided that at no time shall the overall foreign exchange risk exposure and single currency exposure exceed 30% and 20% of regulatory capital, respectively.

**(C) Maintenance of Supporting Documentation**

Each bank and financial institution shall maintain records, which are sufficient to determine at all times its single currency and overall foreign exchange risk exposures. In addition, each bank and financial institution shall maintain a daily record showing close-of-business foreign exchange risk exposures on both single currencies and overall exposures, and a reconciliation of opening-to-closing positions.

**(D) Submission of Returns**

The daily returns in the format given in Schedule 1 – Foreign Exchange Risk Exposure, duly signed by the reporting bank’s or financial institution’s Chief Executive Officer and Chief Financial Officer covering five business days of the week must be submitted to the Bank of Zambia, Financial System Supervision Department, on the Monday following the end of the week to which they relate.

In the actual event or anticipation of a breach, every bank or financial institution shall without delay notify and confirm in writing to the Bank of Zambia, Financial System Supervision Department, of their foreign exchange risk exposure immediately either of this becomes known to the bank or financial institution but in any case not later than the end of the business day to which such breach relates. Such notification to the Bank of Zambia shall include a description of the underlying transactions, foreign currencies involved and any actions undertaken or being undertaken to correct the risk exposure.

**(E) Penalties**

Any excesses above the foreign exchange risk exposure limits set forth in this Part shall by the close of business day attract penalties of 10% of the excess, calculated on a daily basis. Notwithstanding the foregoing, each bank or financial institution shall correct all foreign exchange risk exposures, which exceed the limit by the end of the second consecutive business day. Failure to correct any excesses within the two consecutive business days allowed will attract additional supervisory action.

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## PART II
### FOREIGN EXCHANGE PLACEMENTS BY BANKS AND FINANCIAL INSTITUTIONS

All banks and financial institutions shall with immediate effect observe the following guidelines when placing foreign exchange with counter-parties.

**(A) Foreign Exchange Placements by Banks and Financial Institutions**

1) A bank or financial institution shall be authorised at any time to place a maximum aggregate amount of 60% of its total foreign exchange placements with a related or non-related counter-party.

Such related or non-related counter-party shall have a minimum long-term international rating of A or above.

2) A bank or financial institution shall not be allowed to place a maximum aggregate amount in excess of 40% of its total foreign exchange placements with a related or non-related counter-party that has a long-term international rating of B.

3) A bank or financial institution shall not be allowed to place a maximum aggregate amount in excess of 10% of its total foreign exchange placements in a non-rated related or non-related counter-party.

4) A bank or financial institution shall not place an amount in excess of 5% of its total foreign exchange placements in internationally recognized off-shore banking centres whose laws e.g. secrecy laws, may impede the supervision of the foreign exchange activities of banks and financial institutions by the Bank of Zambia. The aggregate of such placements should not exceed 5% of total foreign exchange placements. The offshore banking centres include, but are not limited to those listed in Schedule 3– List of International Offshore Banking Centres.

5) Related organisations include parent, subsidiary or associate companies.

6) Within 14 days after establishing a counter-party or correspondent relationship and/or making placements with such a bank or financial institution abroad, a bank or financial institution shall notify the Bank of Zambia in writing of the fact and the rating of the correspondent bank or financial institution.

7) Where any counter-party or correspondent relationship already exists at the coming into force of these guidelines, banks and financial institutions shall notify the Bank of Zambia the rating of all such counter-parties immediately.

8) International rating agencies currently recognised by the Bank of Zambia are IBCA, Standard and Poor’s, and Moody’s

**(B) Submissions of Returns**

The daily returns in the format given in Schedule 2 – Report on Foreign Exchange Placements in Foreign Related and Other Organizations duly signed by the reporting bank’s or financial institution’s Chief Executive Officer and Chief Financial Officer covering the five business days of the week must be submitted to the Bank of Zambia, Financial System Supervision Department, on the Monday following the end of the week to which they relate.

**(C) Penalties**

Failure by any bank or financial institution to observe the above limits shall attract a penalty charge equivalent to 10% of the daily amount in excess of the limit for the foreign exchange placements.

## PART III
### FOREIGN EXCHANGE TRANSACTIONS

In relation to CB Circular No. 08/2001, the directive to limit foreign currency demand deposits to 25% of total foreign currency deposits has been dropped.

## PART IV
### EFFECTIVE DATE

This Circular takes effect immediately. However, a grace period of up to 2 May 2001 has been given for every bank and financial institution to ensure that existing foreign exchange placements in excess of the limits set in Part I (1), (2), (3) and (4) above are observed.

Yours faithfully

*Signature*

Dr Abraham Mwenda  
DEPUTY GOVERNOR – OPERATIONS

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## SCHEDULE 1
### FOREIGN EXCHANGE RISK EXPOSURE
(To be completed on a daily basis and submitted to Bank of Zambia every Monday)

| INSTITUTION: | AS AT: |
|--------------|--------|
| NAME: | |
| CHIEF EXECUTIVE OFFICER | SIGNED: | DATE: |
| CHIEF FINANCIAL OFFICER | SIGNED: | DATE: |

| CURRENCY TYPE | (1) USD | (2) GBP | (3) DEM | (4) FFR | (5) ZAR | (6) NLG | (7) TTL | (8) EURO | (9) JPY | (10) OTHERS* | (11) TOTAL (ZMK) |
|---------------|---------|---------|---------|---------|---------|---------|---------|----------|---------|-------------|-----------------|
| **FOREIGN CURRENCY ASSETS** | | | | | | | | | | | |
| 1.1 Balance Sheet Items | | | | | | | | | | | |
| 1.2 Cash and Balances with Banks Abroad | | | | | | | | | | | |
| 1.3 Loans & Advances | | | | | | | | | | | |
| 1.4 Investment in Govt. Securities | | | | | | | | | | | |
| 1.5 Other Foreign assets | | | | | | | | | | | |
| 1.6 Off-balance Sheet Items | | | | | | | | | | | |
| 1.7 Undelivered Spot Purchases | | | | | | | | | | | |
| 1.8 Forward Purchases | | | | | | | | | | | |
| 1.9 Other Off-balance Items | | | | | | | | | | | |
| **Total Foreign Assets (1.1 to 1.9)** | | | | | | | | | | | |
| **FOREIGN CURRENCY LIABILITIES** | | | | | | | | | | | |
| 2.1 Balance Sheet Items | | | | | | | | | | | |
| 2.1.1 Balances due to Banks abroad | | | | | | | | | | | |
| 2.1.2 Loans & Advances | | | | | | | | | | | |
| 2.1.3 Customer deposits | | | | | | | | | | | |
| 2.1.4 Other Foreign Liabilities | | | | | | | | | | | |
| 2.2 Off-balance Sheet Items | | | | | | | | | | | |
| 2.2.1 Undelivered Spot Sales | | | | | | | | | | | |
| 2.2.2 Forward Sales | | | | | | | | | | | |
| 2.2.3 Other Off-balance Sheet Items | | | | | | | | | | | |
| **Total Foreign Liabilities (2.1.1 to 2.2.3)** | | | | | | | | | | | |
| **NET OPEN POSITION** | | | | | | | | | | | |
| 3.1 Long Position in FCY (where 1.3 less 2.1.3 is negative) | | | | | | | | | | | |
| 3.2 Long Position in Kwacha (where 1.4 less 2.1.4 is negative) | | | | | | | | | | | |
| 3.3 Short Position in FCY (where 1.3 less 2.1.3 is negative) | | | | | | | | | | | |
| 3.4 Short Position in Kwacha (where 1.4 less 2.4 is negative) | | | | | | | | | | | |
| **SINGLE CURRENCY EXPOSURE** | | | | | | | | | | | |
| 4.1 Net open position as a %age of regulatory capital | | | | | | | | | | | |
| **OVERALL FOREIGN EXCHANGE EXPOSURE** | | | | | | | | | | | |
| 5.1 Exposure (sum total of 3.2 and 3.4 in Column 11) | | | | | | | | | | | |
| 5.2 Regulatory Capital | | | | | | | | | | | |
| 5.3 Exposure (5.1/5.2)% | | | | | | | | | | | |
| 5.4 Allowable Exposure (15% of Regulatory Capital) | | | | | | | | | | | |
| 5.5 Over/(Under) Exposure (5.1 less 5.4) | | | | | | | | | | | |
| *Please specify currency* | | | | | | | | | | | |

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## SCHEDULE 2
### REPORT ON FOREIGN EXCHANGE PLACEMENTS IN FOREIGN RELATED AND CORRESPONDENT ORGANIZATIONS

Name of bank/financial institution:  
Amounts in Kwacha Millions  
For the week ending: / /  

| | Related Organization | Rating and Rating Agency | Monday | Tuesday | Wednesday | Thursday | Friday | Weekly Average |
|---|---|---|---|---|---|---|---|---|
| 1 | | | | | | | | |
| 2 | | | | | | | | |
| 3 | | | | | | | | |
| 4 | | | | | | | | |
| 5 | | | | | | | | |
| | Other Organizations | | | | | | | |
| 1 | | | | | | | | |
| 2 | | | | | | | | |
| 3 | | | | | | | | |
| 4 | | | | | | | | |
| 5 | | | | | | | | |
| | Total Foreign Currency Placements | | | | | | | |
| Signature: (Chief Executive Officer) | Date: | | | | | | | |
| Signature: (Chief Finance Officer) | Date: | | | | | | | |

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## SCHEDULE 3
### LIST OF INTERNATIONAL OFFSHORE BANKING CENTRES

BERMUDA  
BAHAMAS  
BELIZE  
PANAMA  
CAYMAN ISLES  
ARUBA  
NETHERLANDS ANTILLES  
MONTSErrAT  
BARBADOS  
ANTIGUA  
ANGUILLA  
VIRGIN ISLAND  
TURKS AND CAICOS  
ALDERNEY  
JERSEY AND GUERNSEY  
DUBLIN  
ISLE OF MAN  
GIBRALTAR  
MONACO  
LUXEMBOURG  
LIECHTENSTEIN  
SWITZERLAND  
MALTA  
CYPRUS  
DUBAI  
BAHRAIN  
SINGAPORE  
HONG KONG  
MAURITIUS  
LABUAN  
WESTERN SAMOA  
VANUATA  
COOK ISLANDS

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Bank of Zambia  
P.O. Box 30080  
Lusaka  
10101

20 March 2001

To: All Managing Directors  
Commercial Banks and Financial Institutions

Dear Sirs/Madam

# FOREIGN EXCHANGE RISK EXPOSURE EXPLANATORY NOTES

Further to our CB Circular No. 14/2001 of 19 March 2001, please find attached the explanatory notes for completion of Schedule 1 and determination of the relevant risk exposures.

Yours faithfully,

*Signature*

Abraham Mwenda (Dr)  
DEPUTY GOVERNOR - OPERATIONS