Minimum Guidelines for Operations with the Financial Derivative Instrument 'Currency Forward' that Banks Must Comply with to Offer Them in the Local Market

CD - 41/2012 MINIMUM GUIDELINES FOR OPERATIONS WITH THE FINANCIAL DERIVATIVE INSTRUMENT "CURRENCY FORWARD" THAT BANKS MUST COMPLY WITH TO OFFER THEM IN THE LOCAL MARKET. Approval: 10/31/2012 Validity: 11/15/2012 Alameda Juan Pablo II, between 15 and 17 Norte Ave, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv

THE BOARD OF DIRECTORS OF THE CENTRAL BANK OF RESERVE OF EL SALVADOR, AGREES to issue the following:

MINIMUM GUIDELINES FOR OPERATIONS WITH THE FINANCIAL DERIVATIVE INSTRUMENT "CURRENCY FORWARD" THAT BANKS MUST COMPLY WITH TO OFFER THEM IN THE LOCAL MARKET.

These Guidelines shall be applicable to entities regulated by the Banks Law that
offer to their clients, for hedging purposes, the Currency Forward, understanding that this derivative financial instrument has the objective of covering variations in the exchange rate of the US Dollar of the United States of America with respect to other currencies.
Banks that offer Currency Forward to their clients will request and require prior
authorization from the Central Bank of Reserve of El Salvador.
The Bank's Board of Directors must include in its policies and procedures for the follow-up
and control of risks, those related to the Currency Forward.
The bank must designate a person responsible for the systematic and timely follow-up of the
administration of market, credit, liquidity, and other relevant risks, associated with the Currency Forward, as well as for compliance with the policies established for the control of the operation of this derivative instrument.
The authorization request must be accompanied by a Certification of the relevant point of the Board of Directors
Act of the bank in which it is agreed to request authorization from the Central Bank of Reserve to offer currency forward to its clients for hedging purposes; as well as communication issued by the bank's Audit Committee, in which they state that they comply with the administrative, operational, and internal control requirements as follows:

5.1 Administrative Requirements. Have a manual of the financial derivative instrument
Currency Forward, approved by the Board of Directors, which must contain at minimum the following:

5.1.1 Procedures and requirements for the negotiation, formalization, and monitoring of the
instrument.

5.1.2 Methodology and valuation procedures used, including sources of
information for the required parameters, as well as the corresponding technical notes, that support the fair value of the instrument.

5.1.3 Provisions regarding accounting.

5.1.4 Risk management procedures or techniques to be used, which includes the
identification, measurement, control, mitigation, monitoring, and disclosure of risks.

5.1.5 Procedure to determine the concentration limit of Currency Forward risks within the Entity's portfolio and with respect to its equity.

5.1.6 Contingency plan that allows it to act in case of failures in internal controls or in
the entity's risk tolerance levels.

5.1.7 Other relevant aspects that, in the judgment of the entity, are required for the
negotiation.

5.2 Operational Requirements:

5.2.1 Have a responsible official with recognized experience in the market
of financial derivative instruments and/or with some accreditation. The personnel involved directly or indirectly in the handling of financial derivative instruments must be part of a continuous training program.

5.2.2 Have the technological resources for processing, valuation, and
follow-up of operations.

5.2.3 Have a Job Manual that must indicate the functions and
responsibilities of the personnel involved in the operations of these instruments.

5.3 Internal Control Requirements:

5.3.1 Adequate segregation of functions between Front, Middle, and Back Office.

5.3.2 Procedures to administer potential conflicts of interest that may
arise.

5.3.3 The negotiated operations must be properly documented,
confirmed, recorded, and accounted for once the entity is authorized to offer Currency Forward to its clients, which must be backed by the Master Contract and its components, signed with the client.

5.3.4 The records of the operations and the accounting records must be consistent.

The valuation of the Currency Forward will be carried out daily and it will be the bank that defines its
valuation methodology, formulas, parameters, and sources to be used; which must be done with knowledge of the Central Bank and the Superintendence of the Financial System. Once established its methodology cannot be modified within a period of one year.
The Bank must draft and sign a Master Contract with its client for the operation of
Currency Forward, said contract will contain the main terms and conditions for the negotiation. The Master Contract will be composed of three parts, the text of the master contract itself, the supplement, and the confirmation documents. The Contract will contain at minimum the following aspects: a) Definitions, b) Declarations of capacity/authority of the parties, c) Grounds for early termination, d) Grounds for breach, e) Effects of breach and early termination, and f) Special clauses. The Bank must deposit the Contracts with the Superintendence of the Financial System, so that it is verified jointly with the Consumer Ombudsman, in order to verify that it complies with the referenced consumer rights and are considered for final deposit.
Authorized banks must send to the Central Bank and to the Superintendence of the Financial
System daily and whenever required, the information related to the operations, specifying the number of active contracts, amount of coverage, buyer agent, seller agent, and valuation of the operation referred to the close of each day according to the Annex format.
This type of operations will have aspects to be regulated such as accounting, capital requirement, valuation, and other aspects considered necessary for the adequate development of this product; which will be established in a Technical Norm issued by the Central Bank through the Standards Committee.
The Central Bank may require other information to obtain clarifications on the documentation
presented and will analyze each request and resolve what is pertinent considering the impact that each request has on the stability and development of the financial system. (Approved by the Board of Directors of the Central Bank of Reserve in Session No. 41/2012, of October 31, 2012). (1) Modifications approved by the Board of Directors of the Central Bank of Reserve in Session No. 1/2019, of January 7, 2019, with validity starting from February 1, 2019.

ANNEX (1)
DAILY INFORMATION OF ACTIVE CURRENCY FORWARD
Hedging of US Dollar with respect to other Currencies BANK: CODE:
DATE:
Number of
Active
Contract
Date of celebration contract
Date of expiration contract
Amount of the coverage
Currency of the coverage
Exchange rate of the contract
(Forward)
Exchange rate of day
Buyer
Agent
Seller
Agent
Valuation
Methodology
Valuation
Contract 1
Contract 2
Contract 3
....
Contract n

Number of active contract: the number assigned to the contract by the reporting entity.
Date of contract celebration: the date of celebration of the contract, under the format DDMMYYYY.
Contract expiration date: the expiration date of the contract, under the format DDMMYYYY.
Amount of coverage: nominal value of the contracting.
Currency of coverage: US$ Dollar of the United States of America with respect to currency X. It is suggested to use
the ISO 4217 international standard nomenclature.
Exchange rate of the contract (Forward): Exchange rate (currency conversion rate) of the forward operation according to contract.
Exchange rate of the day: Exchange rate (currency conversion rate) used for the calculation of the valuation.
Buyer Agent: Name of Natural or Legal Person interested in buying currency X.
Seller Agent: Name of Natural or Legal Person interested in selling currency X.
Valuation Methodology: type 1 if the valuation methodology is current and type 2 if the valuation methodology has
changed and from which date it is current.
Valuation: Value of the instrument at the close of this day based on the Bank's methodology.
Contact:
Email:
Department:
Phone Number:
Send this information in Excel format to the Financial System Stability Department of the BCR, at email info.mercados@bcr.gob.sv ; and to the Information Center of the SSF, at email centralinfo@ssf.gob.sv

Minimum Guidelines for Operations with the Financial Derivative Instrument 'Currency Forward' that Banks Must Comply with to Offer Them in the Local Market

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