Instruction on the Specifics of Calculating Open Currency Position Limits at OJSC "Ekobank" Taking into Account Operations Carried Out in Accordance with Islamic Financing Principles (approved by Resolution of the Board of the National Bank of the Kyrgyz Republic No. 6/3 of 2 February 2007)

Registered with the Ministry of Justice of the Kyrgyz Republic

6 March 2007. Registration number 24-07

	Approved by resolution of the Board of the National Bank of the Kyrgyz Republic No. 6/3 of 2 February 2007

INSTRUCTION on the specifics of calculating open currency position limits at OJSC "Ekobank" taking into account operations carried out in accordance with Islamic financing principles

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic No. 91/7 of 16 December 2010)

I. General provisions

II. Procedure for calculating open currency positions

III. Open currency position limits

IV. Bank reporting and the procedure for its submission

V. Sanctions for violation by the bank of the established open currency position limits

VI. Organization of internal control over foreign currency operations

Appendix 1. Daily report on open currency positions (OCP) for operations carried out in accordance with Islamic financing principles

Appendix 2. Consolidated daily report on open currency positions (OCP)

I. General provisions

1.1. This Instruction has been developed within the framework of the implementation of a pilot project for the introduction of Islamic financing principles in the Kyrgyz Republic.

1.2. The purpose of this Instruction is to establish the specifics of calculating open currency position limits at OJSC "Ekobank" (hereinafter the bank) taking into account operations carried out in accordance with Islamic financing principles.

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

1.3.1. Assets placed/acquired under Islamic financing principles - assets placed/acquired under operations permitted by the Regulation "On the implementation of Islamic financing principles in the Kyrgyz Republic within the framework of the pilot project" (approved by resolution of the Board of the NBKR No. 32/2 of 30.10.06, registered with the Ministry of Justice of the Kyrgyz Republic under No. 120-06 of 30.11.06).

1.3.2. Liabilities attracted in accordance with Islamic financing principles - liabilities attracted under operations permitted by the Regulation "On the implementation of Islamic financing principles in the Kyrgyz Republic within the framework of the pilot project" (approved by resolution of the Board of the NBKR No. 32/2 of 30.10.06, registered with the Ministry of Justice of the Kyrgyz Republic under No. 120-06 of 30.11.06).

1.3.3. Currency risk is the risk of the bank incurring losses as a result of a change in the value of the bank's claims (assets)/liabilities denominated in foreign currency, upon an unfavorable change in the exchange rate, at the moment when the bank has an open currency position in that currency. A currency position arises when currency operations are carried out and is an indicator of the degree of the bank's exposure to currency risk.

1.3.4. Currency operations are transactions related to the exchange, purchase/sale (conversion) of foreign currency, as well as other operations as a result of which claims (assets) or liabilities denominated in foreign currency change.

1.3.5. Net currency position is the difference between the bank's claims (assets) and liabilities, both on-balance-sheet and off-balance-sheet, in a separate foreign currency.

1.3.6. If the bank's claims (assets) and liabilities in the respective currencies do not coincide, the currency position is considered open, and in the case of equality - closed.

1.3.7. The bank's open currency position may be long (in the case of an excess of the bank's claims (assets) in the respective currency over its liabilities in the same currency), or short (where liabilities exceed claims (assets)). A long currency position is recorded with a "+" sign, a short one with a "-" sign.

1.3.8. Total currency position is the sum of all the bank's net currency positions in all foreign currencies, calculated using the "short hand" method defined in clause 2.5 of this Instruction.

1.3.9. Open currency position limits are restrictions established by the NBKR, expressed as a percentage ratio of open currency positions (for each foreign currency and the total) to the bank's net total capital. Open currency positions are calculated in Kyrgyz soms at the NBKR accounting rate. Open currency position limits are calculated in percentages with rounding to two decimal places.

1.3.10. Net total capital of the bank - this value is calculated in accordance with the requirements of the Instruction "On the specifics of calculating capital adequacy ratios at OJSC "Ekobank" taking into account operations carried out in accordance with Islamic financing principles".

1.3.11. For the purposes of this Instruction, when calculating open currency position limits, the value of the bank's net total capital as at the 1st day of each month is used.

1.3.12. Transaction date is the date on which the parties reach agreement on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, value date, etc.).

1.3.13. Value date is the date on which funds are credited to the accounts of the parties to the transaction.

II. Procedure for calculating open currency positions

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

• net currency positions for each foreign currency;

• total currency position.

2.2. Net currency positions are calculated in accordance with the Instruction on the procedure for compliance with open currency position limits by commercial banks on the territory of the Kyrgyz Republic (approved by resolution of the Board of the NBKR No. 36/13 of 29 December 2004, registered with the Ministry of Justice of the Kyrgyz Republic under No. 16-05 of 1 February 2005) separately for each foreign currency with mandatory inclusion in the calculation of:

• net spot position in foreign currency for operations carried out by the bank in accordance with Islamic financing principles. This value is calculated as the difference between on-balance-sheet assets and on-balance-sheet liabilities, including outstanding "spot" contracts with a value date of up to 2 days. At the same time, assets and liabilities are included in the calculation at net book value;

• irrevocable tender guarantees, letters of credit and other similar financial contracts concluded in accordance with Islamic financing principles, denominated in foreign currency, under which the bank expects that it will have to pay out funds. At the same time, these instruments are included in the calculation of the net position from the moment the probability arises that the beneficiary will present claims for payment of a sum of money. To assess the probability with a sufficient degree of reliability, the bank may use information on the principal's non-performance (delay in performance) of its obligations, including those not directly related to the terms of the obligation.

2.3. Currency operations are included in the calculation of the currency position from the transaction date, including operations containing a future value date that is not the transaction date.

2.4. When calculating net currency positions for each foreign currency, the values of the currency positions are translated into the som equivalent at the NBKR accounting rate in effect on the reporting date.

2.5. The total currency position for all foreign currencies is calculated using the "short hand" method. Namely, the calculation is carried out by summing separately all long net currency positions and separately all short net currency positions for each currency. The resulting values are then compared with each other (in absolute value), and the larger of the two values is used in calculating the total currency position limit.

III. Open currency position limits

3.1. In order to reduce currency risk, the National Bank of the Kyrgyz Republic establishes the following open currency position limits:

3.1.1. As at the end of the operating day, the size of the open long/short currency position, calculated in accordance with the Instruction on the procedure for compliance with open currency position limits by commercial banks on the territory of the Kyrgyz Republic (approved by resolution of the Board of the NBKR No. 36/13 of 29 December 2004, registered with the Ministry of Justice of the Kyrgyz Republic under No. 16-05 of 1 February 2005) taking into account operations carried out by the bank in accordance with Islamic financing principles, in accordance with the requirements of this Instruction, for each foreign currency must not exceed:

a) for currencies of countries that are members of the Organization for Economic Development and Cooperation (OEDC) 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;

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).

3.1.2. As at the end of the operating day, the size of the total currency position, calculated in accordance with the Instruction on the procedure for compliance with open currency position limits by commercial banks on the territory of the Kyrgyz Republic (approved by resolution of the Board of the NBKR No. 36/13 of 29 December 2004, registered with the Ministry of Justice of the Kyrgyz Republic under No. 16-05 of 1 February 2005) taking into account operations carried out by the bank in accordance with Islamic financing principles, in accordance with the requirements of this Instruction, for all foreign currencies of the countries specified in subparagraph a) of paragraph 3.1.1 of this Instruction, must not exceed 20% of the bank's net total capital.

3.2. Compliance with the established open currency position limits is mandatory at the end of each operating day.

3.3. Exceedances of the established open currency position limits may not be carried over by the bank to the next operating day. By the end of the current operating day, the limits must be brought into compliance with the NBKR's requirements.

3.4. The size of open currency positions during the operating day is controlled by the bank independently, based on its own assessment of the acceptable level of currency risk. At the same time, the bank must maintain the sizes of currency risk during the day in accordance with the internal currency risk management policy approved by the Board of Directors.

3.5. The maximum value of open currency position limits may be reduced by decision of the Supervisory Committee where the bank engages in unreliable and unsound business practices or where there is a threat of violation of banking legislation.

3.6. If the value of the bank's net total capital is negative or equal to zero, the bank must bring the net currency positions for each currency to zero (closed position) within the time limits established by the NBKR.

IV. Bank reporting and the procedure for its submission

4.1. Daily by 9:00 a.m., the bank must submit to the NBKR reports on open currency positions as at the end of the last operating day in accordance with the Instruction on the procedure for compliance with open currency position limits by commercial banks on the territory of the Kyrgyz Republic (approved by resolution of the Board of the NBKR No. 36/13 of 29 December 2004, registered with the Ministry of Justice of the Kyrgyz Republic under No. 16-05 of 1 February 2005), the Periodic Regulatory Banking Report (PRBR) and the appendices to this Instruction.

4.2. The bank, taking into account data from all branches, subsidiary banks and exchange offices, must submit the following reports on open currency positions:

• report on operations carried out in accordance with Islamic financing principles (Appendix 1);

• consolidated report on all operations of the bank (Appendix 2).

V. Sanctions for violation by the bank of the established open currency position limits

5.1. In the event of a violation by the bank of the established open currency position limits, the National Bank of the Kyrgyz Republic applies sanctions in the form of a monetary fine in the amount of 5% of the amount of the violation, but not more than 1% of the amount of the bank's paid-in charter capital, in accordance with the NBKR's regulatory acts.

5.2. In the event of a systematic (more than 2 times within 30 consecutive calendar days) violation by the bank of the established limits, the NBKR may apply other sanctions provided for by banking legislation and the NBKR's regulatory acts, up to and including revocation of the license.

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

5.3. Any attempts by the bank to avoid reflecting the real currency position in reporting in any way will be regarded by the National Bank as:

• attempts to mislead the National Bank;

• unsound banking practice;

• manipulation of the currency position for the purpose of distorting its real value, that is, carrying out dubious operations whose origin and execution cannot be clearly identified and/or if these operations affect the bank's financial statements and its economic ratios;

• submission by the bank of unreliable financial and regulatory reporting. Such currency operations are not taken into account when calculating currency position limits.

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

5.5. Sanctions in the form of a monetary fine are, as a rule, not applied to the bank if the open currency position limit was violated under conditions of force majeure circumstances.

Force majeure circumstances include: natural disasters (floods, earthquakes, fires and other natural or man-made catastrophes), military conflicts, terrorist acts, civil unrest and disturbances, as well as the issuance of regulatory legal acts restricting or prohibiting the performance of any actions and which affected the bank's compliance with the economic ratios established by the National Bank.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic No. 91/7 of 16 December 2010)

5.6. During the period of temporary administration or conservatorship at the bank, the Supervisory Committee has the right to consider the appropriateness of imposing a monetary fine on the bank for non-compliance with the established open currency position limits, taking into account all the circumstances that led to the violation of this economic ratio.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic No. 91/7 of 16 December 2010)

5.7. If the violation of the open currency position limit during the period of temporary administration or conservatorship at the bank was the result of the bank's activities before the introduction of temporary administration/conservatorship, the Supervisory Committee has the right to consider the issue of imposing a monetary fine on the bank with a deferral of its payment.

(As amended by resolution of the Board of the National Bank of the Kyrgyz Republic No. 91/7 of 16 December 2010)

VI. Organization of internal control over foreign currency operations

6.1. To carry out foreign currency operations, the bank must develop an internal currency risk management policy and organize adequate internal control.

6.2. For each of the foreign currency operations carried out, appropriate procedures must be developed, which must reflect at least the following issues:

• separation of the functions of the back and front offices;

• separation of the functional duties of the bank's employees in such a way that one employee cannot perform and/or control any process in full from the initiation of the transaction to its recording in the accounting books;

• introduction of a clear system for authorizing the volume of operations carried out by the bank by the relevant authorized employees of the bank;

• establishment by the bank of internal open currency position limits for each foreign currency and for all currencies as a whole;

• establishment of the level of sufficiency of information on the reliability of counterparties, depending on the nature and degree of risk of the operations performed and the category of the counterparty;

• establishment of requirements for internal audit when conducting inspections of currency operations (at a minimum, the independence of auditors and their possession of the necessary qualifications and knowledge);

• establishment of requirements for accounting and reporting on currency operations for the bank and its branches (form, frequency of submission, responsibility).

	Appendix 1 to the Instruction "On the specifics of calculating open currency position limits at OJSC "Ekobank" taking into account operations carried out in accordance with Islamic financing principles"

DAILY REPORT on open currency positions (OCP) for operations carried out in accordance with Islamic financing principles as at ___.200

NTC as at "01" ______: ______ thousand soms

┌──────┬───────┬────────┬───────────┬─────────────┬────────┬──────────┐ │ Type │ NBKR │ OCP │ Including:│ Balances on │ OCP │ Deviation│ │ of │ accou-│ value ├─────┬─────┤ outstanding │ value │ from the │ │ cur- │ nting │ (thou- │Ba- │Off- │ spot deals │ (% to │ limit │ │ rency│ rate │ sand │lance│bal- │ │ NTC) │ norm (%) │ │ │ │ soms) │ │ance │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┴───────┴────────┴─────┴─────┼─────────────┼────────┼──────────┤ │Total OCP: │ │ │ │ └───────────────────────────────────┴─────────────┴────────┴──────────┘

Signatures:

Place of seal

	Appendix 2 to the Instruction "On the specifics of calculating open currency position limits at OJSC "Ekobank" taking into account operations carried out in accordance with Islamic financing principles"

CONSOLIDATED DAILY REPORT on open currency positions (OCP) as at ___.200

NTC as at "01" ______: ______ thousand soms

┌──────┬───────┬────────┬───────────┬─────────────┬────────┬──────────┐ │ Type │ NBKR │ OCP │ Including:│ Balances on │ OCP │ Deviation│ │ of │ accou-│ value ├─────┬─────┤ outstanding │ value │ from the │ │ cur- │ nting │ (thou- │Ba- │Off- │ spot deals │ (% to │ limit │ │ rency│ rate │ sand │lance│bal- │ │ NTC) │ norm (%) │ │ │ │ soms) │ │ance │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┼───────┼────────┼─────┼─────┼─────────────┼────────┼──────────┤ │ │ │ │ │ │ │ │ │ ├──────┴───────┴────────┴─────┴─────┼─────────────┼────────┼──────────┤ │Total OCP: │ │ │ │ └───────────────────────────────────┴─────────────┴────────┴──────────┘

Signatures:

Place of seal