Notice No. 13/GBM/2005: Regulation of the Interbank Foreign Exchange Market

BANCO DE MOÇAMBIQUE NOTICE NO. 13/GBM/2005 SUBJECT: INTERBANK FOREIGN EXCHANGE MARKET

Given the need to improve the method of selecting proposals for currency auctions and to introduce collateralized operations, the Bank of Mozambique, exercising the powers conferred upon it by paragraph 1 of Article 21 of Law No. 1/92 – Organic Law of the Bank – dated January 3, determines:

1. The Regulation of the Interbank Foreign Exchange Market, attached hereto, is approved, forming an integral part of this Notice.
2. This Notice revokes Notice No. 07/GGBM/2004, dated December 24.
3. Any doubts arising in the interpretation and application of this Notice shall be submitted to the Markets Department of the Bank of Mozambique.

Maputo, November 17, 2005

Adriano Afonso Maleiane Governor

1 Regulation of the Interbank Foreign Exchange Market CHAPTER I Interbank Foreign Exchange Market – Definition and General Aspects

Article 1 (Concept and Objectives)

1. The Interbank Foreign Exchange Market, hereinafter referred to as MCI, is a segment of the foreign exchange market in which authorized institutions buy and sell foreign currency to balance the needs and surpluses of foreign currency among credit institutions, in accordance with the provisions of this regulation.
2. The Bank of Mozambique may intervene in the MCI through the purchase or sale of foreign currency.
3. The operations mentioned in the preceding paragraph may be bilateral or through currency auctions.

Article 2 (Participating Institutions)

1. The following Institutions participate in the MCI: a) Commercial Banks operating in Mozambique; b) Other Credit Institutions, subject to prior authorization by the Bank of Mozambique.

2. The Bank of Mozambique also intervenes, in accordance with paragraph 2 of Article 1.

3. The institutions referred to in the preceding paragraphs must subscribe to the MCI Code of Conduct and comply with its provisions.

Article 3 (Minimum Amount of MCI Operations)

1. The minimum amount of any MCI operation in which the Bank of Mozambique participates as a counterparty shall not be less than USD 250,000 (Two hundred and fifty thousand US dollars), except in cases of pro-rata allocation resulting from currency auctions.
2. The minimum amount of operations carried out between the other participating institutions shall be as agreed upon by the parties.

Article 4 (Currency of Transaction)

1. The transaction currency in operations where the Bank of Mozambique is the counterparty shall be the United States Dollar (USD).
2. In transactions where the Bank of Mozambique is not the counterparty, other currencies different from the USD may be used, as agreed upon by the parties.

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Article 5 (Bank Quotations)

1. The Bank of Mozambique provides online, through the software application - Exchange Module, a window where participating institutions will register daily their buy and sell exchange rates for USD/MZM.
2. Participating institutions may update their exchange rates throughout the day. The buy exchange rate of each institution may not exceed the global average of the system's buy quotations, calculated at the end of the previous business day, plus a percentage margin to be defined by the Bank of Mozambique and disseminated through the Market Operations System (SOM).
3. The formation of the exchange rates referred to in paragraph 1 of this article must adhere to the principles established in the MCI Code of Conduct.

Article 6 (MCI Operating Hours) The MCI will operate continuously, on all business days, from 8:30 hours to 15:30 hours.

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CHAPTER II Purchase and Sale of Foreign Currency Operations Between Participating Institutions

Article 7 (Purchase and Sale of Foreign Currency)

1. The participating institutions referred to in Article 2 may carry out purchase and sale of foreign currency operations among themselves.
2. The operations referred to in the preceding paragraph may be carried out with or without guarantees.
3. If carried out with guarantees, on the trade date, the purchasing bank must deliver securities at their current value, corresponding to the counter-value of the operation, according to the formula attached.
4. The securities given as guarantee must be the same ones used in Interbank Money Market operations and have a maturity date equal to or greater than the value date of the operation.
5. If the counter-value is paid on the value date of the operation, the securities will be returned to the purchasing bank of foreign currency.
6. If the counter-value of the operation is not paid, the securities will become the permanent property of the selling bank of foreign currency.

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Article 8 (Duty to Inform the Bank of Mozambique) Whenever the participating institutions mentioned in paragraph 1 of Article 2 carry out operations as referred to in the preceding article, they must inform the Bank of Mozambique of the fact, through the software application (MCI Module), within the normal operating hours of the MCI.

Article 9 (Settlement and Confirmation Procedure) The confirmation and settlement of the operations described in Article 1 of this Chapter will be processed in accordance with the stipulated in Article 17 of this Regulation.

CHAPTER III Currency Auction

Article 10 (Frequency) The Markets Department of the Bank of Mozambique will fix the frequency of the currency auction, taking into account the specific conditions of the market.

Article 11 (Announcement of Conditions for Currency Placement) The conditions for the placement of foreign currency for purchase or sale, namely, amount (if fixed or indicative), value date, information on the Bank of Mozambique's correspondent (account and SWIFT code), will be announced electronically or by other means of communication indicated by the Bank of Mozambique.

Article 12 (Criteria for Selection of Proposals)

1. Currency auctions will be based on proposals presented by the institutions.
2. When an auction is announced, with a fixed or indicative amount, institutions may present proposals to which the following rules will apply: a) For each auction, institutions may present up to a maximum of 5 proposals, indicating their respective exchange rates. b) The amount of each proposal will be USD 250,000.00 (two hundred and fifty thousand US dollars). c) Proposals will be satisfied starting from those presenting the highest or lowest exchange rates for the purchase or sale of foreign currency, successively, until the amount proposed by the Bank of Mozambique is reached.

d) In the case of an auction for the sale of foreign currency by the Bank of Mozambique, only those presented within a band determined from the global average of buy quotations calculated on the business day prior to the auction will be satisfied in the order mentioned in the previous sub-paragraph. The fluctuation margin of the band, from -K to +K, will be managed discretely by the Bank of Mozambique and will consist of the application of factor K on the global average of the aforementioned buy quotations. e) The amount to be transacted at the last rate that satisfies the requirements of sub-paragraphs c) and d) will, when necessary, be pro-rated in proportion to the amounts proposed by the participating institutions at the said rate. f) In the case of an auction with a fixed amount, the Bank of Mozambique reserves the right not to sell in total.

3. In proposals, exchange rates must not present "decimal places".
4. The Bank of Mozambique will communicate, through the software application or other means it indicates: a) To the proposing institutions, the total amount of foreign currency bought/sold; b) To the institutions participating in the MCI, the total amount of foreign currency bought/sold, the weighted average exchange rate of the auction, and the minimum or maximum accepted exchange rate, depending on whether it is a sale or purchase auction.

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5. After the selection of proposals, the usual steps of the MCI Module in the software application will follow for the respective settlement and accounting of the operation by the BM.

CHAPTER IV MCI Software Application and Designation of Users

Article 13 (MCI Software Application) All MCI operations, whether between Participating Institutions or between them and the Bank of Mozambique, must be carried out electronically via the Bank of Mozambique's software application.

Article 14 (Designation of Users)

1. To access the software application, each Participating Institution must designate two people with the profile to register and two others with the profile to authorize operations.
2. The designation must be communicated to the Bank of Mozambique, by letter addressed to the Legal Affairs Office, which must be made, with the necessary adaptations, according to the model of approvers and communicators of Interbank Money Market (MMI) operations, attached to the Regulation of the Market Operations System, approved by Notice No. 3/GGBM/2003, dated August 11, or alternatively, through the attachment of a power of attorney with special powers to authorize operations up to the limit indicated therein.

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CHAPTER V Forms of Communication, Information to be Communicated, Confirmation and Settlement Procedures of Operations

Article 15 (Forms of Communication)

1. Participating institutions will transmit electronically, using the software application or other means of communication indicated by the Bank of Mozambique, the elements relating to the operations they intend to carry out.
2. The Bank of Mozambique will use the same means of communication to announce the operations it proposes to carry out and to transmit the respective results.

Article 16 (Elements to be Communicated) In MCI operations, Participating Institutions must communicate, according to the type of operation, the following information: a) Amount; b) Currency; c) Exchange rate; d) Value date; e) SWIFT Code of the Correspondent abroad and respective account number for the credit of foreign currency; f) Nature of the operation, the participating institution must, in cases of foreign currency purchase, enter the data in the software application as a demand for foreign currency, and in the inverse case as an offer or telephone offer.

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Article 17 (Confirmation and Settlement of Operations)

1. All operations carried out will be confirmed via the software application by changing the status by the user with the authorizer (approver) profile from "communicated" to "approved".
2. After the confirmation of the operation provided for in paragraph 1 of this article, institutions must confirm the operations via SWIFT message.
3. The settlement of operations implies, in an irreversible manner, the movement of the deposit accounts in Meticals of current deposit of the participating institutions with the Bank of Mozambique.

Article 18 (Value Date)

1. The value date of operations in which the Bank of Mozambique participates as one of the counterparties will be indicated by itself.
2. Whenever the value date of foreign currency purchase or sale operations does not coincide with a business day in one of the markets of the currencies involved, it will be transferred to the immediately following business day.
3. In the case where one of the parties fails to meet the negotiated value dates, the injured party may demand, as compensation, interest at market rates and all expenses charged by correspondents during the period in which the default occurs.

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CHAPTER VI Statistical Information

Article 19 (Statistical Information Submitted by the Bank of Mozambique) The Bank of Mozambique will provide, daily, electronically, the following information: a) Daily exchange tables, for valuation purposes. b) Daily and weekly summary of operations carried out in the market including the respective amounts and exchange rates applied.

Article 20 (Statistical Information Submitted by MCI Participants)

1. MCI participants must submit daily information to the Bank of Mozambique about all foreign exchange operations carried out with their clients.
2. The format of the information as well as the reference period thereof will be stipulated in specific regulation.

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CHAPTER VII General Provisions

Article 21 (Evidence) The Bank of Mozambique, on the value date of the operations, will proceed to the movement of the National Currency current deposit accounts of the intervening institutions and will issue Debit or Credit Bordereaux, which will constitute sufficient proof of the effectiveness of the operations.

Article 22 (Suspension) The Bank of Mozambique may suspend any institution from carrying out the operations provided for in the MCI whenever it finds that its actions may affect the proper functioning of the market.

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ANNEX FORMULA FOR CALCULATING THE VALUE OF COLLATERALS TO BE DELIVERED AS GUARANTEE IN THE CONTRACTING OF FOREIGN CURRENCY PURCHASE OPERATIONS.

1. Trade date of the foreign currency purchase and sale operation between Commercial Banks.

Calculation of the current value of securities:

VN*36500 36500 VA = --------------- * ------------- 36500+t (n-d) 36500+td

2. Value date of the operation 36500*VN VA’ = -------------------- 36500+tn’

where: VA = Current value of securities on the trade date; VA’ = Current value of securities on the trade date; VN = Nominal value of the Securities; T = Weighted average subscription interest rate of the securities of the auction by each bank; n = Maturity term of the securities; d = Period between the trade date and the value date; n’ = (n-d)