Resolution 102/2008: Approval of the Regulation for the Administration of International Reserves

BOARD RESOLUTION NO. 102/2008 SUBJECT: INTERNATIONAL OPERATIONS MANAGEMENT - APPROVES THE REGULATION FOR THE ADMINISTRATION OF INTERNATIONAL RESERVES.

HAVING SEEN: Law No. 1670 of October 31, 1995, of the Central Bank of Bolivia (BCB). Board Resolution No. 153/2005 of December 6, 2005, which approves the Regulation for the Administration of International Reserves. Board Resolution No. 157/2007 of December 18, 2007, which approves the Annual Investment Policy for the 2008 management period. Report from the International Operations Management (GOI) No. 007/2008 of June 27, 2008. Report from the Legal Affairs Management (SANO) No. 180/2008 of June 27, 2008.

CONSIDERING: That Chapter II of Title II of Law No. 1670 establishes the functions that the BCB must perform regarding International Reserves. That the Report from the International Operations Management (GOI) No. 007/2008 recommends modifying the current Regulation for the Administration of International Reserves in order to optimize the management and investment of said reserves.

That according to the Report from the Legal Affairs Management (SANO) No. 180/2008, the Regulation does not contravene the current legal framework and that, in accordance with the attribution conferred by Article 54, subsection o) of Law No. 1670, the Board is authorized to approve, modify, and interpret the regulations of the BCB.

THEREFORE, THE BOARD OF DIRECTORS OF THE CENTRAL BANK OF BOLIVIA, RESOLVES:

Article 1.- Approve the new Regulation for the Administration of International Reserves, which, as an annex, forms an integral part of this Resolution.

Article 2.- This Regulation shall enter into force from its approval.

Article 3.- Repeal Board Resolutions No. 153/2005 and No. 157/2007 of December 6, 2005, and December 18, 2007, respectively, and all provisions contrary to this Regulation.

Article 4.- The Presidency and the General Management are charged with the execution and compliance of this Resolution.

La Paz, July 22, 2008

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Raúl Garrón Claure

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Gustavo Blacutt Alcalá Hugo Dorado Araníbar

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Rolando Marín Ibáñez Ernesto Yáñez Aguilar

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Osvaldo Nina Baltazar

ANNEX REGULATION FOR THE ADMINISTRATION OF INTERNATIONAL RESERVES

CHAPTER I GENERAL PROVISIONS

Article 1.- (Object and Criteria) The purpose of this Regulation is to establish the policies and norms for the administration of the International Reserves of the Central Bank of Bolivia (BCB), with criteria of security, liquidity, capital preservation, and profitability.

Article 2.- (International Reserves Committee) I. The International Reserves Committee, constituted in accordance with the BCB Statute, meets at least once a month to evaluate investments made by the International Operations Management and by delegated administrators. II. Before the start of each semester, it will determine the minimum and maximum level of working capital and the reference structure of the portfolios that make up the international reserves. III. It will define the treatment to be applied to investments in which their credit risk rating decreases to a level below the minimum required in Article 12 of this Regulation. IV. It will define the treatment for cases where mergers, absorptions, or subrogations of financial entities occur in which there are investments, current accounts are maintained, or delegated administration or custody of securities services are provided.

CHAPTER II ON INTERNATIONAL RESERVES

SECTION I STRUCTURE AND COMPOSITION OF INTERNATIONAL RESERVES

Article 3.- (International Reserves) I. International Reserves are composed of International Monetary Reserves and Gold Reserves. II. International Monetary Reserves are composed of Working Capital and Investment Capital.

Article 4.- (Working Capital) I. The objective of Working Capital is to meet immediate payment requirements and fund transfers abroad. It is composed of Overnight Investments, balances in current accounts abroad, and vault cash. II. The General Management, in coordination with the Monetary Operations Management and International Operations Management, will approve the amounts and dates for the sending or receipt of foreign currency in banknotes.

Article 5.- (Investment Capital) I. Investment Capital is constituted by the liquidity tranche and the investment tranche, which will be composed of the instruments and operations authorized by Article 9 of this Regulation. II. The objective of the liquidity tranche is to provide resources immediately to Working Capital to meet its requirements. This tranche is managed under internal administration in charge of the International Operations Management and is composed of the Liquidity Portfolios and Deposits. III. The objective of the investment tranche is to maximize returns in the medium term. This tranche is managed through internal administration and/or delegated administration and is composed of the Investment and Global Portfolios.

Article 6.- (Gold Reserves) I. Gold Reserves are constituted by investments in time deposits, balances in allocated (physically) or unallocated (book entry) accounts, and gold bars that possess the quality of London Good Delivery Bars. II. Investments may be made in countries with a long-term sovereign credit risk rating of AAA, in the Bank for International Settlements (BIS), the World Bank (WB), and in financial entities that are members of the London Bullion Market Association with a long-term rating equal to or greater than A+. III. The percentage of gold held abroad and the purchase or sale operations of gold will be authorized by the BCB Board of Directors through an express resolution. IV. Investments in gold by issuer must not exceed 20% of the portfolio value, excluding the BIS and the World Bank.

Article 7.- (Authorized Currencies) I. Working Capital is constituted predominantly in United States dollars and to a lesser extent in other currencies of countries that comply with what is established in Article 11 of this Regulation. II. The Liquidity Tranche and the Investment Portfolio are constituted in United States dollars. III. The Global Portfolio is constituted in United States dollars, British pounds, euros, Japanese yen, and Canadian dollars, with a limit of up to 10% of investment capital.

SECTION II REFERENCE BENCHMARKS AND AUTHORIZED INSTRUMENTS AND OPERATIONS

Article 8.- (Reference Benchmarks) The following reference benchmarks are established:

Investment Capital Reference Benchmark (Benchmark) Liquidity Tranche Liquidity Portfolio Merrill Lynch US Treasury Bills 3 to 6 months Index (G0B2) Deposits Portfolio 6-month average LIBID in USD. Investment Tranche Investment Portfolio Merrill Lynch US Treasuries 1 to 3 years Index (G102) Global Portfolio Merrill Lynch Global Government Bonds G7 1 to 3 years Index (W1G7) 90% hedged in USD.

Article 9.- (Authorized Instruments and Operations) The instruments and operations authorized for investment capital are:

• Overnight Deposits
• Repurchase of Securities (Repos and Reverse Repos)
• Securities Lending.

With a maximum maturity of 6 months:

• Time Deposits

With a maximum maturity of 1 year:

• Commercial Paper
• Certificates of Deposit

With a maximum maturity of 10 years:

• Securities issued by governments
• Securities issued by agencies
• Securities issued by supranational organizations
• Floating Rate Notes
• Interest Rate Futures, Forwards, and Swaps Contracts.

For exclusive use of delegated administrators:

• Asset Backed Securities (ABS)
• Mortgage Backed Securities (MBS)
• Covered Bonds
• Corporate Bonds
• Treasury Inflation Protected Securities
• Currency Futures, Forwards, and Swaps Contracts.

CHAPTER III GLOBAL RISK POLICY

Article 10. (Global Risk) I. The probability of recording losses in a year must be less than an ex-ante target of 4%. II. The active risk exposure for each portfolio in Investment Capital is equivalent to an ex-ante tracking error of maximum 100 basis points, measured against the reference benchmarks defined in Article 8 of this Regulation.

Article 11.- (Sovereign Risk) The country where investments will be made and the country of the head office of the institutions in which International Reserve investments will be made or with which intermediation will be carried out, must have a long-term sovereign credit risk rating equal to or greater than AA-.

Article 12.- (Credit Risk) I. The investment of International Reserves is made with issuers or in issuances that have a short-term rating equal to or greater than F-1 or a long-term rating equal to or greater than A, as appropriate to the maturity of the investment made. II. Investments are made in non-subordinated debt securities and without any component associated with the equity market. III. Investments of International Reserves may be made in the BIS.

Article 13.- (Interest Rate Risk) I. For the liquidity tranche, the maximum investment term per instrument is 1 year. II. For the Portfolios of the Investment Tranche, the effective duration has a range of +/- 1 with respect to the duration of its reference benchmark defined in Article 8 of this Regulation. III. The convexity of each portfolio must be greater than -0.5. IV. The margin duration of each portfolio must be less than 2.5.

Article 14.- (Exchange Rate Risk) In the Global Portfolio, open positions in the currencies defined in Article 7 are allowed, with a central point of 10% and an interval of 5% to 15% on the value of said portfolio.

Article 15.- (Concentration Risk) The limits for concentration on the total of international monetary reserves are:

Sector/issuer Total international monetary reserves Government 100% Agencies 70% Per agency 15% Supranational 70% Per supranational 15% Global Banking 70% Per banking issuer 10%

CHAPTER III DELEGATED ADMINISTRATION AND CUSTODY OF SECURITIES

Article 16.- (Delegated Administration) I. The Delegated Administration of international monetary reserves is carried out by international organizations, financial institutions, or fund administrators that manage assets equal to or greater than USD 150,000,000,000.-, contracted in accordance with what is provided in the specific regulation for the contracting of these services. II. The total delegated amount must not exceed 30% of investment capital. III. The amount delegated per institution must not exceed 10% of investment capital.

Article 17.- (Custody) The custody services for the investments of International Reserves are carried out in the BIS and in banks or financial institutions that have a long-term issuer credit risk rating equal to or greater than A+, and that comply with what is provided in Article 11 of this Regulation.

CHAPTER IV COMMON PROVISIONS

Article 18.- (Performance of Investments) The performance of the BCB's International Reserves will be evaluated with reference to the United States dollar.

Article 19.- (Prohibitions) Investments in agencies of banks or financial institutions classified as "Offshore" are prohibited.

Article 20.- (Intermediaries) The purchase and sale of securities will be carried out with primary dealers, eligible financial institutions, or institutions registered in the Stock Exchanges of the countries defined in Article 11 of this Regulation.

Article 21.- (Credit Risk Rating Agency) The Credit Risk Ratings mentioned in this Regulation correspond to Fitch Information Inc. In the event that ratings from another Credit Risk Rating Agency are used, the ratings equivalent to Fitch Information Inc. will be taken into account.

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