Uniform Accounting Procedure for REPO Transactions

BANGLADESH BANK
HEAD OFFICE
POST BOX NO. 325
DHAKA.

DOS Circular No.- 06 Date: 15/07/2010
DEPARTMENT OF OFF-SITE SUPERVISION
Web:
www.bangladesh-bank.org www.bangladeshbank.org.bd Chief Executive All Scheduled Banks in Bangladesh.

Dear Sir,
Uniform Accounting Procedure for REPO Transactions Banks in Bangladesh are free to engage in repo transactions with Bangladesh Bank and with other banks and financial institutions which maintain a current account with Bangladesh Bank. Although there are several circulars and circular letters on repo operational procedure, it has been observed that some confusion still remain regarding the accounting treatment of repo transactions. Considering the inherent risk involved in repo operation and its implications in the financial statements, Bangladesh Bank (BB) has decided to introduce a uniform accounting procedure for repo operation as a prudential measure aimed at better risk management. From now on, banks are advised to comply with the following guidelines relating to repo operation in government securities:

1. Requirement for a Master Agreement:
   A separate Master Agreement shall be executed with each counterparty (banks and financial institutions), with whom the bank is willing to conduct repo operation. The Master Agreement shall be prepared considering the credit worthiness of the counterparty, transfer of legal title of the security, timing of payments, default procedures and the consequential rights and obligations of the counterparties, etc. The terms and conditions shall be approved by the Board of Directors/CEO (in case of foreign banks) of the bank and shall be reviewed as and when required. Banks shall conduct inter-bank repo under such Master Agreements from 1 January 2011.

2. Requirement for disclosure:
   According to the General instructions for preparation of financial statements contained in 4(Ka) of Article 38 (1st schedule) of "e¨vsK †Kv¤úvbx AvBb, 1991", banks are required to disclose the amount of securities put under repo separately. To disclose their continuous interest in the securities under repo and the obligation against the securities acquired under repo (reverse repo), banks are advised to provide details of their outstanding repo and reverse repo transactions in the financial statements in the format attached in Annexure-1. P.T.O.

3. Eligibility of securities to be put under repo:

4. Securities having 3 (three) days to coupon payment or 3 (three) days to maturity shall not be
   put under any category of repo.

5. Securities acquired under reverse repo shall not be put under repo or liened for any purpose or
   sold by the buyer unless the counter party defaults.

6. Eligibility of securities under repo for maintaining SLR:

7. As the security under repo will be excluded from the investment portfolio of the seller (in 1st
   leg), it will not be eligible for SLR purpose for the seller.

8. The security acquired under reverse repo will be eligible for SLR purpose initially at its clean
   price (in case of coupon bearing security) or at its market value (in case of non-coupon bearing security) by the buyer. If the revaluation date falls within the repo period, then the new market value will be eligible for SLR purpose.

9. Accounting procedure:

10. The security shall exit (in the 1st leg of repo) at the book value and enter (in the 2nd leg of
    repo) into the seller's book at the market value determined in the 1st leg.

11. The cash consideration for the 1st leg of repo will be the market value of the security (plus
    coupon interest accrued up to the previous date of the repo agreement in case of coupon bearing security).

12. The cash consideration for the 2nd leg of repo will be the 1st leg cash consideration plus repo
    interest.

13. In case of repo of both coupon and non-coupon bearing (Treasury bill) security, the seller
    shall adjust the Revaluation Reserve Account for HFT securities and respective reserve account for HTM securities and the weekly revaluation (if the revaluation date falls within the repo period) of the same security shall be stopped.

14. In case of repo of a coupon bearing security, the seller shall stop the accrual of the coupon
    interest and as there is no possibility of coupon payment during the period under repo; the buyer shall also not accrue the coupon interest.

15. The buyer shall revalue the coupon bearing security acquired under repo in case the
    revaluation date falls within the repo period.

16. The buyer shall not revalue the non-coupon bearing security acquired under repo as the short
    term securities have lower susceptibility to interest rate movement.

17. The following accounts shall be opened: a) in the seller's book- i) Coupon Interest
    Expenditure Account and ii) Repo Interest Expenditure Account b) in the buyer’s book- i) Coupon Interest Adjustment Account, ii) Repo Interest Income Account.

18. At the end of the accounting period, debit balances in the Coupon Interest Expenditure
    Account and Repo Interest Expenditure Account and credit balance in the Repo Interest Income Account shall be taken into profit & loss Account. P.T.O.

19. To reflect the accrual of interest in respect of the outstanding repo/reverse repo transactions
    at the end of the accounting period, appropriate entries shall be passed in the profit and loss account of the seller's and buyer's books. Such entries shall be reversed on the first working day of the next accounting period.

20. The purchase of treasury securities under reverse repo shall have to be reported in DB-5d
    statement.

21. A comprehensive accounting procedure with necessary accounting entries and explanation is
    given in Annexure-2.
    All other instructions contained in the DOS circular letter No.-05/2008 and DOS circular letter No.-05/2009 shall remain valid except the changes made by this circular. This will have an effect from 1 September 2010. Repo agreements made before the effective date of this circular shall continue till the maturity. Please acknowledge receipt. Yours sincerely, Sd:/- (Sultan Ahmed) General Manager Phone: 7120376

Annexure-1 a.(i) Disclosure regarding outstanding Repo as on 31 December:
Sl. no.
Counter party name Agreement Date Reversal Date Amount (1st leg cash consideration) Total (ii) Disclosure regarding outstanding Reverse Repo as on 31 December:
Sl. no.
Counter party name Agreement Date Reversal Date Amount (1st leg cash consideration) Total b. Disclosure regarding overall transaction of Repo and Reverse repo:
Minimum outstanding during the year
Maximum outstanding during the year
Daily average outstanding during the year
Securities sold under repo:
i) with Bangladesh Bank ii) with other banks & FIs Securities purchased under reverse repo:
i) from Bangladesh Bank ii) from other banks & FIs

Annexure-2
A. Repo of Coupon Bearing HFT Securities
REPO 1st Leg
Face Value of the bond under
Repo a 100,000,000.00
Book Value as on 23/12/2009 b 106,695,338.42
Balance in Revaluation Reserve a/c 6,695,338.42 Coupon c 10.60% Coupon Payment Dates 1 Jan & 1 July Repo agreement Date 24/12/2009 Repo Maturity 26/12/2009 Tenor 3 days Accrued Coupon upto 23/12/2009 d = c176a/365 5,111,232.88 Market yield as on 24/12/2009 9.5441% Market Value as on 24/12/2009 (clean price) e 105,033,930.56 Cash consideration for 1st leg (Market value of the bond + accrued coupon interest) f = e + d 110,145,163.44 REPO 2nd Leg Repo Interest rate g 4.50% Repo Interest h = fTenorg/364 40,850.54 Total cash consideration for 2nd leg i = f + h 110,186,013.98 Seller’s book :
Date Description Debit Credit
24/12/2009 1st Leg
Cash Account 110,145,163.44
Revaluation Reserve Account 6,695,338.42
Treasury Bond Account 106,695,338.42
P/L Account 5,033,930.56
Coupon Interest Account 5,111,232.88
27/12/2009 2nd Leg
Treasury Bond Account 105,033,930.56
Coupon Interest Expenditure Account 5,111,232.88 Repo Interest Expenditure Account 40,850.54 Cash Account 110,186,013.98 Buyer’s book:
Date Description Debit Credit
24/12/2009 1st Leg
Treasury Bond Account 105,033,930.56
Coupon Interest Adjustment Account 5,111,232.88 Cash Account 110,145,163.44 27/12/2009 2nd Leg Cash Account 110,186,013.98 Treasury Bond Account 105,033,930.56 Repo Interest Income Account 40,850.54 Coupon Interest Adjustment Account 5,111,232.88

B. Repo of HFT Treasury Bill
REPO 1st Leg
Face Value of the bill under Repo a 100,000,000.00 Acquisition price 90,000,000.00 Book Value b 99,953,650.28 Balance in Revaluation Reserve a/c 173,431.00 Repo agreement Date 24/12/2009 Repo Maturity 26/12/2009 Tenor 3 days Market value as on 24/12/2009 c 99,949,803.32 Cash consideration for 1st leg (Market value of the bill as on 24/12/2009) d = c 99,949,803.32 REPO 2nd Leg Repo Interest rate e 4.50% Repo Interest f = dTenore/364 37,069.30 Total cash consideration for 2nd leg g = d + f 99,986,872.62 Seller’s book :
Date Description Debit Credit
24/12/2009 1st Leg
Cash Account 99,949,803.32
Revaluation Reserve Account 173,431.00
Treasury Bill Account 99,953,650.28
P/L Account 169,584.04
2nd Leg
Treasury Bill Account 99,949,803.32
Repo Interest Expenditure Account 37,069.30
Cash Account 99,986,872.62
Buyer’s book:
Date Description Debit Credit
24/12/2009 1st Leg
Treasury Bill Account 99,949,803.32
Cash Account 99,949,803.32
27/12/2009 2nd Leg
Cash Account 99,986,872.62
Treasury Bill Account 99,949,803.32
Repo Interest Income Account 37,069.30

C. Repo of Coupon Bearing HTM Securities
REPO 1st Leg
Face Value of the bond under Repo a 100,000,000.00 Book Value b 91,500,065.86 Balance in reserve for HTM securities 1,500,065.86 Coupon c 10.60% Coupon Payment Dates 1 Jan & 1 July Repo agreement Date 24/12/2009 Repo Maturity 26/12/2009 Tenor 3 days Accrued Coupon upto 23/12/2009 d = c176a/365 5,111,232.88 Market yield 9.5441% Market Value as on 24/12/2009 (clean price) e 105,033,930.56 Cash consideration for 1st leg (Market value of the bond + accrued coupon interest) f = d + e 110,145,163.44 REPO 2nd Leg Repo Interest rate g 4.50% Repo Interest h = fTenorg/364 40,850.54 Total cash consideration for 2nd leg i = f + h 110,186,013.98 Seller’s book :
Date Description Debit Credit
24/12/2009 1st Leg
Cash Account 110,145,163.44
Reserve for HTM Securities Account 1,500,065.86 Treasury Bond Account 91,500,065.86 P/L Account 15,033,930.56 Coupon Interest Account 5,111,232.88 27/12/2009 2nd Leg Treasury Bond Account 105,033,930.56 Coupon Interest Expenditure Account 5,111,232.88 Repo Interest Expenditure Account 40,850.54 Cash Account 110,186,013.98 Buyer’s book:
Date Description Debit Credit
24/12/2009 1st Leg
Treasury Bond Account 105,033,930.56
Coupon Interest Adjustment Account 5,111,232.88 Cash Account 110,145,163.44 27/12/2009 2nd Leg Cash Account 110,186,013.98 Treasury Bond Account 105,033,930.56 Repo Interest Income Account 40,850.54 Coupon Interest Adjustment Account 5,111,232.88

D. Repo of HTM Treasury Bill
REPO 1st Leg
Face Value of the bill under Repo a 100,000,000.00 Issue Date 01/07/2009 Book Value 94,000,000.00 Balance in reserve for HTM securities b - Repo agreement Date 24/12/2009 Repo Maturity 26/12/2009 Tenor 3 days Market value as on 24/12/2009 c 98,286,047.29 Cash consideration for 1st leg (Market value of the bill as on 24/12/2009) d = c 98,286,047.29 REPO 2nd Leg Repo Interest rate e 4.50% Repo Interest f =dTenore/364 36,452.24 Total cash consideration for 2nd leg g = d + f 98,322,499.53 Seller’s book :
Date Description Debit Credit
24/12/2009 1st Leg
Cash Account 98,286,047.29
Reserve for HTM Securities Account -
Treasury Bill Account 94,000,000.00
P/L Account 4,286,047.29
27/12/2009 2nd Leg
Treasury Bill Account 98,286,047.29
Repo Interest Expenditure Account 36,452.24
Cash Account 98,322,499.53
Buyer’s book:
Date Description Debit Credit
24/12/2009 1st Leg
Treasury Bill Account 98,286,047.29
Cash Account 98,286,047.29
27/12/2009 2nd Leg
Cash Account 98,322,499.53
Treasury Bill Account 98,286,047.29
Repo Interest Income Account 36,452.24