Circular 81-6 on Foreign Exchange Risk Management

1 | P a g e Bank of the Republic of Haiti CIRCULAR No. 81-6 TO BANKS Pursuant to Article 83 of the Law of May 14, 2012 on Banks and Other Financial Institutions, banks are required to comply with the provisions of this Circular regarding foreign exchange risk management.

1. Definitions The following definitions apply to this Circular: a) Internal Needs: foreign currency needs of the banking establishment for the purpose of acquiring materials, equipment, supplies, etc. They can be met from: i. either the structural position, i.e., from foreign currency resources generated within the framework of its operations or any foreign currency released internally through foreign currency lending operations, foreign currency investments, etc.; ii. or the trader position, i.e., from the bank's intervention in the foreign exchange market to buy foreign currency for its own account during a day. b) Monetary asset and liability items expressed in foreign currency: fixed-value asset and liability items, i.e., whose amount in foreign or national monetary units is fixed by contract or otherwise, and does not fluctuate based on changes in prices. c) Equity: the net value of a banking establishment, i.e., the total of asset items minus the total of liability items on the balance sheet of said establishment. d) Foreign exchange operations (spot and forward): purchases or sales of foreign currency where the time delay separating the commitment date and the delivery date differs. For spot operations, this delay generally does not exceed two (2) business days, whereas for forward operations, this delay is greater than two (2) business days. e) Exchange position: the difference between foreign currency assets and liabilities (balance sheet items only, excluding off-balance sheet items). It is qualified as long when assets exceed liabilities and short in the opposite case. It results from the overall structure of the asset and liability items recorded on a bank's balance sheet as well as from daily foreign currency trading. f) Foreign exchange risk: the risk incurred by a bank regarding the fluctuation of exchange rates when this establishment maintains a position in one or more currencies. Any unfavorable

2 | P a g e fluctuation in exchange rates can result in losses for a banking establishment. The assessment of foreign exchange risk depends on the amount and duration of exposure to risk as well as the magnitude of possible rate fluctuations. g) Affiliated companies: two entities where one holds 10% or more of the capital of the other. The capital consists of all categories of shares with or without voting rights making up the share capital of an entity. h) Forward rates (forward prices): the market rate for the remaining period for a forward foreign exchange operation. i) Reference rate (reference price): the daily exchange rate determined by the BRH.

2. Exchange Position In the course of its foreign exchange operations, every banking establishment has two (2) types of position: a) the trader position, which is the difference between third-party foreign currency purchases and foreign currency sales from these purchases during a business day. It is said to be long when purchases exceed sales at the end of the day and short in the opposite case. b) the structural exchange position, which is the difference between foreign currency assets and foreign currency liabilities. It is said to be long when assets exceed liabilities and short in the opposite case.

2.1. Trader Position Every banking establishment must have a zero trader position at the end of the day. In other words, for a given day, all foreign currencies purchased from third parties must be mandatorily sold by the end of that day. It should be noted that: a) in the event of a long trader position observed, the BRH automatically becomes the buyer, at the average buying rate of the banking system, without notice, by debiting the account of the offending establishment held with it. b) under no circumstances can the trader position be short. Regarding transactions for internal needs, the following measures apply: a) banks must first use the resources released from their operations to satisfy their needs. If these resources are insufficient, they may go to the market to acquire the difference; b) transactions for internal needs must be recorded at the average buying rate of

3 | P a g e the bank for the day; c) the details of transactions must be reported in Annex I (I.5. Report on the breakdown of internal needs) of this Circular; d) banks must submit a breakdown of transactions while indicating the reasons for which they were carried out as well as the amount and rate used on the day of the transaction. Transactions carried out with affiliates are not part of internal needs. It remains understood that these transactions must be done at the market rate and must be reported in detail in Annex I of this Circular.

2.2. Structural Exchange Position Banking establishments are required to respect the following structural exchange position at all times: a maximum ratio of 0.50% between the cumulative long positions (all currencies combined) and short positions (all currencies combined) on the one hand and the total of their accounting equity on the other hand. At no time can off-balance sheet items be considered in the calculation of this exchange position. At the end of each day, any banking establishment reporting a long position greater than 0.50% of accounting equity is required to dispose of this position. If this excess position is not closed out, the BRH automatically becomes the buyer of this position, on the second business day following, at the bank reference rate. Sales of foreign currency from foreign currency resources generated within the framework of the bank's operations cannot be taken into account in the calculation of the trader position. They must be reported separately in the daily report provided in the exchange module of the SIF. Under no circumstances, within the same business day, can the banking establishment sell foreign currency from availability other than the day's purchases without having first satisfied its internal needs.

3. Foreign Currency Operations with Affiliates It is prohibited for any banking establishment to carry out foreign currency transactions with any of its affiliates for the purpose of bringing its net exchange position within the limit provided in this Circular. Furthermore, any foreign currency transaction (purchase or sale) by a bank with any of its affiliates – natural or legal persons – must be done at the market price so that any purchase and any sale carried out, in a short period, by the affiliate would result in an exchange loss for the latter.

4. Closing Time for Foreign Currency Purchase and Sale Operations Foreign exchange market operations (online and counter transactions) end every business day at 11:59 P.M. Those carried out beyond this time will be recorded on the next business day.

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5. Frequency of Revaluation of Foreign Currency Assets and Liabilities Banking establishments must revalue their foreign currency assets and liabilities on a monthly basis, on the accounting closing date, using the reference rate of the last day of the month. Forward foreign exchange operations must be revalued according to the forward rate of each operation on the accounting closing date.

6. Accounting Principles Banking establishments must follow the following accounting principles when preparing periodic and year-end financial statements. Transactions carried out in foreign currency (other than those for purchase and sale of foreign currency) They are converted into gourdes at the exchange rate prevailing on the date of the transaction, unless the operation is hedged; in the latter case, the rate established according to the conditions of the hedge must be used. Monetary asset and liability items expressed in foreign currency These items are revalued in gourdes at the BRH reference rate prevailing on the date of production of the financial statements. Gains and losses resulting from revaluation are recorded in the statement of income and expenses. For some of these items having a predetermined or predictable life of more than one year, the gains and losses resulting from revaluation can either be recorded in the statement of income or carried forward and amortized over their remaining useful life. Foreign exchange operations (spot and forward) They are converted at the rate of the operation. Gains and losses resulting from these operations are recorded in the statement of income and expenses. For forward foreign exchange operations, in accordance with the "mark to market" rule, gains and losses resulting from revaluation are recorded in the statement of income and expenses.

7. Reports Banks are required to complete and send to the BRH the following reports: • Daily report on the trader position - via the exchange module of the SIF (Annex I) Submission deadline: the next business day at noon following the reference date of the report. • Daily report on the net exchange position (Annex II) Submission deadline: the next business day at noon following the reference date of the report. • Monthly detailed report on US Dollar assets and liabilities (Annex III)

5 | P a g e Submission deadline: 3 business days following the reference date of the report, i.e., the last business day of the month. • Monthly compliance report on the structural exchange position (Annex IV) Submission deadline: 3 business days following the reference date of the report, i.e., the last business day of the month. • Monthly detailed report on off-balance sheet US Dollar assets and liabilities (Annex V) Submission deadline: 3 business days following the reference date of the report, i.e., the last business day of the month.

8. Sanctions In the event of non-compliance with the obligations defined in this Circular, banks are subject to the following penalties: a) Reliability of information At all times, the amounts declared in the reports provided for in section 7 must be those appearing in the accounting books of a banking establishment. Failing to comply with this directive, the BRH may, after investigation into the circumstances and the nature of the violation, impose a penalty of 30% of the difference between the amounts declared in the reports and the amounts appearing in the accounting books. b) Non-compliance with the regulatory limit according to daily reports The penalty is calculated based on the excess established in the daily report on the net exchange position (Annex II). In the daily report, the net exchange position is compared to the amount of equity appearing in the last monthly financial statements submitted to the BRH. A banking establishment can exceed the 0.50% limit only if it proves to the BRH that its equity at the date of preparation of the daily report allows it to respect the regulatory limit of 0.50%. The excess exchange position converted into gourdes that is not justified by the banking establishment is penalized at a rate of 1/10 of 1% per day of excess. When a banking establishment is penalized two days or more during a given month, the penalty applicable on the penalty day of the following month doubles to pass to 2/10 of 1% per day of excess. For excess days in other consecutive months, the penalty increases by 1/10 of 1% each month. c) Purchases of foreign currency for internal needs

6 | P a g e Failing to comply with the provisions of subsection 2.1 of this Circular, any banking establishment is subject to a penalty equivalent to 50% of the total amount of foreign currency purchased for internal needs. d) Foreign currency operations with affiliates Failing to comply with section 3 of this Circular, any banking establishment is subject to a penalty of 25% of the value of the irregular transaction per day of infraction. The period of the penalty extends from the day the infraction was committed until the day of its discovery. e) Penalty for late submission of compliance reports Failing to provide, within the required deadline, the compliance reports provided for in section 7 of this Circular, the banking establishment is subject to a penalty of fifty thousand gourdes (HTG 50,000.00) per day of infraction. The penalty period extends from the day of the infraction until the day when the information is made available to the BRH. Any penalty will be deducted from the balance of one of the accounts of the offending establishment at the BRH

9. Repeal and Entry into Force This Circular repeals Circular #81-5 of April 3, 2017. It enters into force on June 10, 2019. Port-au-Prince, May 29, 2019. Jean Baden Dubois Governor

7 | P a g e List of Annexes Annex I - Daily report on the trader position (via SIF) I.1. Report on Dollar purchases I.2. Report on Dollar sales from day's purchases I.3. Daily compliance report I.4. Report on Dollar sales from liquidity other than day's purchases (from the structural position) I.5 Report on the breakdown of internal needs Annex II - Daily report on the net exchange position. Annex III - Monthly detailed report on US Dollar assets and liabilities. Annex IV - Monthly compliance report on the structural exchange position. Annex V - Monthly detailed report on off-balance sheet US Dollars

8 | P a g e ANNEX I (1 of 3) TRADER POSITION DAILY REPORT Banking Establishment: As of: I.1. REPORT ON DOLLAR PURCHASES Client Names Amount Rate Types of Transactions *Other TOTAL PURCHASES Average buying rate Less Internal Needs (Annex I.5) Total net Dollar purchases from Internal Needs *Other: foreign currency transactions listed whose cumulative percentage for any item does not exceed 5% of the total.

9 | P a g e ANNEX 1 (2 of 3) TRADER POSITION DAILY REPORT I.2. REPORT ON DOLLAR SALES FROM DAY'S PURCHASES Client Names Amount Rate Types of Transactions TOTAL

10 | P a g e ANNEX 1 (3 of 3) TRADER POSITION DAILY REPORT I.3. DAILY COMPLIANCE REPORT TRADER POSITION* Dollar Purchases Net Internal Needs Dollar sales from day's purchases Difference *This trader position, under no circumstances, can be short. I.4. REPORT ON DOLLAR SALES FROM LIQUIDITY OTHER THAN DAY'S PURCHASES (OR FROM THE STRUCTURAL POSITION) Client Names Amount Reasons Average Selling Rate I.5. REPORT ON THE BREAKDOWN OF INTERNAL NEEDS Reasons Amount Types of Transaction Buying Rates TOTAL - Signature of two authorized executives: Position/Title:

11 | P a g e ANNEX II (1 of 4) NET EXCHANGE POSITION DAILY REPORT Banking Establishment: …………………………. As of: ………………………………. This report must be produced the next business day at noon following the reference date of the report. This daily report constitutes an interim report by which the BRH tracks the evolution of the regulatory exchange position of banking establishments. Since the equity of a banking establishment is calculated on a monthly basis, the daily net exchange position must be compared to the amount of equity appearing in the last monthly financial statements submitted to the BRH. (in gourdes) Signature of two authorized executives: Position/Title: 1-TOTAL OF THE CUMULATIVE NET POSITIONS BY CURRENCY (see Annex II - page 12) 2-EQUITY (according to the amount appearing in the last monthly financial statements submitted to the BRH) NET POSITION AS A PERCENTAGE OF EQUITY (1/2) (cannot exceed 0.50%) NET POSITION AS A PERCENTAGE OF EQUITY

12 | P a g e ANNEX II (2 of 4) NET EXCHANGE POSITION DAILY REPORT (in US Dollars) Total Dollars Euros Pounds Other Other Canadian Sterling currencies currencies (2) (3) (4) (5) (6) Dollars Dollars Euros Pounds Other Total US Canadian Sterling currencies ASSETS LIABILITIES NET POSITION NET POSITION (in gourdes) ASSETS LIABILITIES NET POSITION NET POSITION (in gourdes) CUMULATIVE POSITIONS (1) (2) (3) (4) (5) +(6) (in gourdes)

13 | P a g e ANNEX II (3 of 4) NET EXCHANGE POSITION DAILY REPORT (in US Dollars) I-TOTAL ASSETS Cash Immediate Collection Effects Balance at BRH Balance in Local Banks Balance in Foreign Banks Investments in Securities Credit Portfolio Other Debtors Security Deposits Debtors by Acceptance Head Office and Branches Other Assets (to be specified) Total Assets (Appearing on the unconsolidated balance sheet) TOTAL ASSETS = Total Assets II-LIABILITIES Deposits Demand Obligations Term Obligations Head Office and Branches Acceptances in Circulation Provisions Other Liabilities (to be specified) TOTAL Liabilities (Appearing on the unconsolidated balance sheet) TOTAL LIABILITIES = Total Liabilities NET POSITION IN CURRENCY

14 | P a g e ANNEX II (4 of 4) NET EXCHANGE POSITION DAILY REPORT (including off-balance sheet items) (in US Dollars) Signature of two authorized executives: _____________________ ________________________ Position/Title: I-TOTAL ASSETS Cash Immediate Collection Effects Balance at BRH Balance in Local Banks Balance in Foreign Banks Investments in Securities Credit Portfolio Other Debtors Security Deposits Debtors by Acceptance Head Office and Branches Other Assets (to be specified) Total Assets (Appearing on the unconsolidated balance sheet) Foreign currencies purchased not yet received Forward purchases Other Assets (to be specified) Total off-balance sheet assets TOTAL ASSETS (INCLUDING OFF-BALANCE SHEET) II-LIABILITIES Deposits Demand Obligations Term Obligations Head Office and Branches Acceptances in Circulation Provisions Other Liabilities (to be specified) TOTAL Liabilities (Appearing on the unconsolidated balance sheet) Foreign currencies sold not yet delivered Forward sales Guarantees and Letters of Credit Other Credit Commitments (to be specified) TOTAL LIABILITIES (INCLUDING OFF-BALANCE SHEET) NET POSITION IN CURRENCY

15 | P a g e ANNEX III (1 of 2) MONTHLY DETAILED REPORT DOLLAR ASSETS Banking Establishment: As of: (in US Dollars) 0 to 90 91 to 180 181 to 360 1 year and More Total Days Plus I-ASSETS Cash Port-au-Prince, Provinces Immediate Collection Effects Local Banks, Foreign Bank Balance at BRH Balances in Local Banks Balances in foreign banks Head Office and Br. Current Accounts Investments (CD's, T/D, INV) Other Banks (to be specified) Current Accounts Investments (CD's, T/D, INV) Investments in Securities Credit Portfolio Guaranteed Loans Clients Residents Non-residents Financial Institutions Unsecured Loans Clients Residents Non-residents Financial Institutions Foreign Currency Advances Clients Residents Non-residents Financial Institutions Other Debtors Interest and other revenues to receive Other (to be specified) Security Deposits Debtors by Acceptance Head Office and Branches Other Assets (to be specified) Total Assets (Appearing on the unconsolidated balance sheet)

16 | P a g e ANNEX III (2 of 2) MONTHLY DETAILED REPORT DOLLAR LIABILITIES Banking Establishment: As of: (in US Dollars) 0 to 90 days 91 to 180 days 181 to 360 days 1 year and more Total Signature of two authorized executives:

Position/Title: II-LIABILITIES Demand Deposits Residents Non-residents Savings Deposits Residents Non-residents Term Deposits Residents Non-residents Demand Obligations Client Residents Clients Non-residents Certified Checks Financial Institutions (guarantee) Deposits received as security Collections to be deposited Overdrafts B/E Transfers and Transfers to Pay Interest to Pay Other (to be specified) Term Obligations Local Banks Banks to Foreign Head Office and Branches Acceptances in Circulation Provision Provisions for doubtful debts Other provisions (to be specified) Other Liabilities (to be specified) TOTAL Liabilities (Appearing on the unconsolidated balance sheet

17 | P a g e ANNEX IV STRUCTURAL EXCHANGE POSITION MONTHLY COMPLIANCE REPORT Banking Establishment: ____________________________ As of: _________________ (in gourdes) Signature of two authorized executives: Position/Title: 1-TOTAL OF THE CUMULATIVE NET POSITIONS BY CURRENCY (see Annex II-page 12 on the date of the last business day of the month) 2-EQUITY (according to the amount appearing in the financial statements submitted to the BRH on the same date as the report) REGULATORY LIMIT (1/2) (cannot exceed 0.5%)

18 | P a g e ANNEX V MONTHLY DETAILED REPORT ON OFF-BALANCE SHEET Banking Establishment: As of: (in US Dollars) 0 to 90 days 91 to 180 days 181 to 360 days 1 year and more Total (in US Dollars) 0 to 90 days 91 to 180 days 181 to 360 days 1 year and more Total Signature of two authorized executives:

Position/Title: I-OFF-BALANCE SHEET ASSETS Foreign Currencies Purchased Not Yet Received Forward Purchases Other (to be specified) Total Off-Balance Sheet Assets II-OFF-BALANCE SHEET LIABILITIES Foreign Currencies Sold Not Yet Delivered Forward Sales Guarantees and Letters of Credit Other Credit Commitments (to be specified) Total Off-Balance Sheet Liabilities