Instruction on the Procedure for Compliance with Limits on Open Currency and Precious Metals Positions by Commercial Banks in the Kyrgyz Republic

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Creation date: 2025-09-08

Approved

by the resolution of the Board of Directors of the National Bank of the Kyrgyz Republic of December 29, 2004 No. 36/13

INSTRUCTION

on the procedure for compliance with limits on open currency positions and open positions in precious metals by commercial banks in the territory of the Kyrgyz Republic

(As amended by resolutions of the Board of Directors of the NBKR of August 25, 2005 No. 26/5, September 23, 2009 No. 38/5, December 16, 2010 No. 91/7, November 16, 2012 No. 43/1, December 24, 2014 No. 58/14, June 24, 2015 No. 35/7, December 14, 2016 No. 48/11, June 8, 2017 No. 2017-P-12/23-10, October 17, 2018 No. 2018-P-12/43-2, April 6, 2022 No. 2022-P-12/20-1, January 17, 2024 No. 2024-P-12/1-3, March 20, 2024 No. 2024-P-12/12-2, May 15, 2024 No. 2024-P-12/22-1)

This Instruction establishes the procedure for calculating open positions and monitoring compliance with limits on open currency positions and open positions in precious metals (hereinafter referred to as "open positions") by commercial banks operating in the territory of the Kyrgyz Republic. To achieve the goals and fulfill the tasks of the National Bank of the Kyrgyz Republic (hereinafter referred to as the "National Bank"), the Board of Directors of the National Bank may, by separate resolution, change the values of the established open position limits for a limited period.

This procedure for compliance with open position limits applies to all commercial banks (hereinafter referred to as "banks").

This Instruction applies to JSC "Financial Company of Credit Unions" regarding the procedure for calculating open currency positions (for each foreign currency and in aggregate) and monitoring compliance with open currency position limits.

When developing internal policies and risk control procedures, banks must be guided by the requirements of this Instruction.

(As amended by resolutions of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10, January 17, 2024 No. 2024-P-12/1-3, March 20, 2024 No. 2024-P-12/12-2)

I. Definitions

1. For the purposes of this Instruction, the following definitions apply:

1.1. Currency risk is the risk of a bank incurring losses due to changes in the value of the bank's claims (assets)/obligations denominated in foreign currency, in the event of an unfavorable change in the exchange rate, at the moment when the bank has an open currency position for that currency. A currency position arises from the conduct of currency transactions and is an indicator of the degree of the bank's exposure to currency risk.

1.2. Currency transactions are deals related to the exchange, purchase/sale (conversion) of foreign currency, as well as other transactions resulting in changes to claims (assets) or obligations denominated in foreign currency.

1.3. Net position is the difference between the bank's claims (assets) and obligations, both on-balance sheet and off-balance sheet, for each foreign currency separately and for each type of precious metal separately (gold, silver, platinum), excluding numismatic (collectible) coins.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.4. Open position is the mismatch between the bank's claims (assets) in a foreign currency/type of precious metal and the bank's obligations in the same foreign currency/same type of precious metal, and in the case of equality, the position is considered closed.

The open position is calculated separately for each foreign currency and for each type of precious metal.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.5.

A bank's open position can be long (in the case where the bank's claims (assets) in the corresponding currency/same type of precious metal exceed its obligations in that same currency/same type of precious metal), or short (when obligations exceed claims (assets)). A long currency position is recorded with a "+" sign, and a short one with a "-" sign.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.6. Aggregate position is the sum of all net positions of the bank for all foreign currencies or for all types of precious metals, calculated using the "short hand" method, defined in paragraph 2.5 of this Instruction.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.7. Open position limits are restrictions established by the National Bank, expressed as a percentage of open currency positions (for each foreign currency/each type of precious metal and in aggregate) to the bank's net total capital. Open currency position limits are calculated in percentages rounded to two decimal places.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.8. Net total capital of the bank is this value, calculated in accordance with the requirements of the Instruction on the determination of standards for capital adequacy of commercial banks of the Kyrgyz Republic. For the purposes of this Instruction, when calculating open position limits, the value of the bank's net total capital as of the 1st day of each month is used.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.9. Date of transaction conclusion is the date of reaching an agreement between the parties on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, settlement date, type, mass of precious metal, etc.).

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

1.10. Settlement date is the date on which funds are credited to the accounts of the transaction participants.

II. Procedure for Calculating Open Positions

2.1. As of the end of each working day, the bank must calculate the following indicators:

• net currency positions for each foreign currency;
• aggregate currency position;
• net positions for each type of precious metal;
• aggregate position in precious metals.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

2.2. Net positions are calculated separately for each foreign currency and type of precious metal as the sum of the following indicators:

• Net spot position in foreign currency/type of precious metal. This value is calculated as the difference between on-balance sheet assets and on-balance sheet obligations (including unfinished "spot" contracts with a settlement date up to 2 days and "spot" contracts that are part of "SWAP" contracts). In this case, assets and obligations are included in the calculation at their net book value.

Note: For the purposes of this Instruction, a "SWAP" contract is understood as an operation representing a combination of two transactions: a "spot" and a "forward" contract for the same amount/mass of precious metal (the principal amount of the "SWAP" contract), with the same counterparty, for a specific period of time.

• Net forward position in foreign currency/type of precious metal. This value is calculated as the difference between claims and obligations under "forward" contracts (including futures), as well as "forward" contracts that are part of "SWAP" contracts (the principal amount of the "SWAP" contract).

Irrevocable guarantees, letters of credit, and similar financial instruments issued or confirmed by the bank, denominated in foreign currency/type of precious metal, except for guarantees, letters of credit, and similar financial instruments secured in the same currency/same type of precious metal. For the purposes of this Instruction, financial instruments imply bill guarantees (aval), traveler's checks, and other conditional obligations of the bank accepted in international practice. Credit lines are not considered financial instruments.

In this case, the aforementioned guarantees, letters of credit, and similar financial instruments are included in the calculation of the net position from the moment the beneficiary (beneficiary) submits a claim for payment of the monetary amount under the obligation or the bank receives documented information indicating a high probability of a claim for payment under the aforementioned obligations. For example, a letter from the beneficiary regarding non-performance (delay in performance) of the principal's obligations is grounds for including the guarantee in the calculation of the net position.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

2.3. Currency transactions and transactions with precious metals are included in the calculation of the net position from the date of transaction conclusion, including transactions containing a future settlement date that is not the date of transaction conclusion.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

2.4. When calculating net currency positions for each foreign currency, the values of currency positions are converted into som equivalents at the official exchange rate of the National Bank acting on the reporting date.

When calculating net positions in precious metals:

• precious metals in non-cash form in quantitative terms are calculated at the evening fixing established by the London Precious Metals Association on the day preceding the day of accounting, calculated via the cross-rate of the official exchange rate of the US dollar to the som, established by the National Bank on the reporting date;

• precious metals in physical form are reflected in quantitative terms and the price is specified, determined in accordance with the bank's accounting policy.

(As amended by the resolution of the Board of Directors of the NBKR of April 6, 2022 No. 2022-P-12/20-1)

2.5. The aggregate position is calculated using the "short hand" method. Namely, the calculation is carried out by summing separately all long net positions and separately all short net positions for each currency/each type of precious metal. Then, the resulting values are compared with each other (in absolute value), and the largest of the two values is used when calculating the aggregate position limit.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

III. Open Position Limits

3.1. For the purpose of reducing banks' currency risk, the National Bank of the Kyrgyz Republic establishes the following limits on open currency positions:

3.1.1. As of the end of the business day, the size of the open long/short currency position for each foreign currency must not exceed:

a) for currencies of countries that are members of the Organisation for Economic Co-operation and Development (hereinafter - OECD) and/or for currencies of countries that have signed Article 8 of the "Articles of Agreement" with the IMF - 15% of the bank's net total capital. The list of OECD member states is posted on the official website www.oecd.org. The list of countries that have signed Article 8 of the "Articles of Agreement" with the IMF is posted on the official website www.imf.org;

b) for currencies of countries that have not signed Article 8 of the "Articles of Agreement" with the IMF - 0% of the bank's net total capital (closed position).

(As amended by the resolution of the Board of Directors of the NBKR of November 30, 2016 No. 47/6)

3.1.2. As of the end of the business day, the size of the aggregate currency position for all foreign currencies of countries specified in sub-item a) of paragraph 3.1.1 of this Instruction must not exceed 20% of the bank's net total capital.

3.1.3. For the purpose of regulating transactions for the purchase and sale of precious metals, the National Bank establishes for commercial banks a limit on the aggregate open position in precious metals:

a) as of the end of the business day, the size of the open long/short position for each type of precious metal must not exceed 15% of the bank's net total capital;

b) as of the end of the business day, the size of the aggregate position in precious metals in total must not exceed 20% of the bank's net total capital.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.2. Banks are obliged to comply with the established open position limits at the end of each business day.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.3. Exceedances of the established open position limits cannot be carried over by the bank to the next business day. By the end of the current business day, the limits must be brought into compliance with the requirements of the National Bank.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.4. The magnitude of open positions during the business day is controlled by banks independently, based on their own assessment of the permissible level of currency risk and risks associated with precious metal transactions. In this case, each bank must maintain risk sizes during the day in accordance with the internal risk management policy approved by the Board of Directors.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.5. The maximum value of open position limits may be reduced by a decision of the Supervisory Committee for individual banks when they engage in unreliable and unhealthy business practices or in the event of a threat of violation of banking legislation.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.6. In the event that the bank's net total capital is negative or equal to zero, the bank must bring net positions for each currency/each type of precious metal to a zero value (closed position) within the timeframes established by the National Bank.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

3.7. Precious metals held by the bank in safekeeping and as collateral are not obligations of the bank and are not included in the calculation of the open position in precious metals.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

IV. Bank Reporting and Submission Procedure

4.1. Daily by 9:00 a.m., banks must submit to the National Bank a report on open positions as of the end of the last business day according to Appendices 1 and 2.

(As amended by resolutions of the Board of Directors of the NBKR of September 23, 2009 No. 38/5, June 8, 2017 No. 2017-P-12/23-10)

4.2. Banks with branches and subsidiary banks conducting transactions in foreign currency and transactions with precious metals, as well as those with exchange offices, must submit aggregated data on open positions in the report, taking into account data from all branches, subsidiary banks, and exchange offices.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

V. Measures of Impact for Violation by Banks of Established Open Position Limits

(Name of section as amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

5.1. In the event of a bank violating the established open position limits as of the end of each business day, the National Bank applies measures of impact in the form of a fine equal to 5% of the violation amount, but not more than 10% of the regulatory minimum size of the bank's charter capital.

(As amended by the resolution of the Board of Directors of the NBKR of October 17, 2018 No. 2018-P-12/43-2)

5.1-1. In the event of a written consent of the bank to the fact of violation of open position limits and the amount of the fine, a resolution on imposing a fine is issued by the Deputy Chairman/Member of the Board of Directors of the National Bank overseeing the supervisory block.

In other cases, the consideration of the issue of a bank's violation of open position limits, as well as the application of measures of impact in the form of a fine, is carried out in the established procedure.

(As amended by the resolution of the Board of Directors of the NBKR of May 15, 2024 No. 2024-P-12/22-1)

5.2. In the event of systematic (more than 2 times over consecutive 30 calendar days) violation by a bank of established limits, the National Bank may apply other measures of impact provided for by banking legislation and regulatory legal acts of the National Bank, up to the revocation of the license.

Note: Exceeding established limits within 0-0.05% does not entail the application of a fine.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

5.3. Any attempts by a bank to avoid reflecting the real net position in reporting will be considered by the National Bank as:

• attempts to mislead the National Bank;
• unhealthy and unsafe banking practice;
• manipulation of the net position with the purpose of distorting its real magnitude, i.e., conducting dubious transactions, the origin and commission of which cannot be clearly identified and/or if these transactions affect the bank's financial reporting and its economic indicators;
• provision by the bank of unreliable financial and regulatory reporting. Such transactions are not taken into account when calculating open position limits.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

5.4. In the event of a violation of any of the requirements of this Instruction, the bank's management is obliged to immediately inform the National Bank about the violations committed and submit written explanations regarding the causes of the violation within two days, along with a list of measures taken by the bank to eliminate it.

5.5. Measures of impact in the form of a fine are generally not applied to a bank if the open position limit was violated under conditions of force majeure circumstances.

Force majeure circumstances include: natural disasters (floods, earthquakes, fires, and other natural or technological catastrophes), military conflicts, terrorist acts, civil unrest and riots, as well as the issuance of regulatory legal acts restricting or prohibiting the performance of certain actions and affecting the bank's performance of economic indicators established by the National Bank.

(As amended by resolutions of the Board of Directors of the NBKR of December 16, 2010 No. 91/7, June 8, 2017 No. 2017-P-12/23-10)

5.6. During the period of action of a temporary administration in the bank, the Supervisory Committee has the right to consider the expediency of collecting a fine from the bank for non-compliance with established open position limits, taking into account all circumstances that led to the violation of this economic indicator.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

5.7. In the event that the violation of the open position limit during the period of action of a temporary administration in the bank was the result of the bank's activities prior to the introduction of the temporary administration, the Supervisory Committee has the right to consider the issue of collecting a fine from the bank with a deferral of its payment.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

VI. Organization of Internal Control for Foreign Currency Transactions

6.1. For the conduct of foreign currency transactions, banks must develop an internal currency risk management policy and organize adequate internal control.

6.2. For each of the foreign currency transactions conducted, corresponding procedures must be developed, which must reflect, at a minimum, the following issues:

• separation of functions between back and front offices;
• separation of functional responsibilities of bank employees such that one employee cannot execute and/or control any process in full from the initiation of the transaction to its recording in accounting books;
• implementation of a clear system of authorizing the volume of transactions conducted by the bank by corresponding authorized bank employees;
• establishment by the bank of internal limits on open currency positions for each foreign currency and in total for all currencies;
• establishment of the level of information sufficiency regarding the reliability of counterparties, depending on the nature and degree of risk of the transactions conducted and the category of the counterparty;
• establishment of requirements for internal audit when conducting checks of currency transactions (at a minimum, independence of auditors and their having the necessary qualifications and knowledge);
• establishment of requirements for accounting and reporting on currency transactions for the bank and its branches (form, frequency of submission, responsibility).

6.3. The organization of internal control for transactions with precious metals is carried out in accordance with the norms established in the Regulation on transactions of commercial banks with precious metals.

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

Appendix 1

REPORT

on open currency positions (OCP)

(As amended by the resolution of the Board of Directors of the NBKR of August 25, 2005 No. 26/5)

NTC: ________________ thousand som

Currency Type

National Bank Exchange Rate

OCP Value (thousand som)

Including:

OCP Value (% of NTC)

Deviation from limit norm (%)

Balances on unfinished spot transactions

balance

off-balance

sale

purchase

...

Aggregate OCP:

Appendix 2

REPORT

on open positions in precious metals (OPM)

(As amended by the resolution of the Board of Directors of the NBKR of June 8, 2017 No. 2017-P-12/23-10)

NTC: _____________________ thousand som

Type of Precious Metal

Accounting Rate

OPM Value (thousand som)

Including:

OPM Value (% of NTC)

Deviation from limit norm (%)

Balances on unfinished spot transactions

balance

off-balance

sale

purchase

gold

silver

platinum

Aggregate OPM:

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