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The Reserve Bank of Fiji issued this revised policy to supersede the 2016 version and establish strict standards for licensed commercial banks managing foreign exchange and settlement risks. The document mandates comprehensive risk management frameworks, independent oversight, and precise measurement systems to identify and mitigate exposures arising from trading and structural imbalances. It enforces specific maximum limits on overnight net open positions, capping single currency exposure at 12.5% of total capital and overall exposure at 25%, while requiring strict adherence to internal controls and reporting protocols.
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Reserve Bank of Fiji
Banking Supervision Policy Statement No: 4 (Revised 2025) MINIMUM REQUIREMENTS FOR THE MANAGEMENT OF FOREIGN EXCHANGE RISK FOR LICENSED COMMERCIAL BANKS NOTICE TO BANKS LICENSED UNDER THE BANKING ACT 1995 Reserve Bank of Fiji April 2025
PART 1: PRELIMINARY
1.0 Introduction
1.1 This Policy is issued under Section 14(3) of the Banking Act, 1995 as part of
the Reserve Bank of Fiji’s standards governing the conduct of banking business in Fiji. This Policy supersedes the Banking Supervision Policy Statement No.4 issued in 2016. The Policy must be read in conjunction with Banking Supervision Policy Statement No. 19 (BSPS 19)1 , which establishes the framework for the management of market risk.
1.2 This Policy provides the guidelines on the management of foreign exchange
risk and settlement risk; and sets out the maximum limits for foreign currency net open positions; and reporting requirements in relation to prudent management of foreign currency exposures of licensed commercial banks.
2.0 Objectives of the Policy
2.1 The objectives of the Policy are to:
a) minimise foreign exchange risk by imposing prudent limits on banks’ overnight net open positions in foreign currencies. b) ensure that banks have in place adequate foreign exchange risk management systems, appropriate operational guidelines and internal controls intended to identify, measure, monitor and mitigate foreign exchange risk and settlement risk; c) establish a uniform procedure for computing, recording and reporting foreign exchange exposures of banks; and d) define Minimum Working Balances held in Foreign Currencies by Banks allowed under Section 42 of the Reserve Bank of Fiji Act 1985.
3.0 Background to the Approach
3.1 An essential part of the Reserve Bank’s responsibility for the supervision of
banking institutions is to ensure that each institution’s board and senior management fully understand, and maintain effective controls over the risks inherent in all areas of the institution’s operations.
3.2 Foreign exchange risk is the risk of financial loss to banks arising from
adverse movements in foreign exchange rates. Excessive foreign exchange risk can pose a significant threat to banks’ earnings and capital adequacy. Therefore, banks should adopt effective measures to address the risk arising from their foreign exchange operations and exposures.
3.3 Foreign exchange risk exposures can be divided broadly into two categories:
(1) Structural and (2) Trading. Structural exposures typically arise because of structural imbalance between assets and liabilities, and these do not normally change rapidly. Whilst, trading exposures arise and change rapidly, and are subject to prescribed trading limits. 1 Minimum Requirements for the Management of Market Risk for Licensed Financial Institutions.
3.4 The prescribed limits set in this policy aim to address the risks of trading
exposures, however, each bank’s in-house policies must include measures to address the risks of both structural and trading exposures.
PART 2: REQUIREMENTS OF THE POLICY
4.0 Foreign Exchange Risk Management Framework
4.1 Managing foreign exchange risk is a fundamental component in the safe and
sound management of all banks that have exposures in foreign currencies. It involves the prudent management of foreign currency positions in order to control, within set parameters, the impact of changes in exchange rates on the financial positions of banks.
4.2 The frequency and direction of exchange rate changes, the extent of the
foreign currency exposure and the ability of counterparty to honour their obligations to the banks are significant factors in foreign exchange risk management. It is therefore essential that each bank puts in place a comprehensive foreign exchange risk management framework, taking into account the nature and complexity of their foreign exchange activities.
4.4 The foreign exchange risk management framework must comprise the
following:
foreign exchange risk management policy; and at the minimum, should include the following:
5.3 Risk Measurement and Reporting Systems
5.3.1 Banks should have foreign exchange risk measurement systems that
encompass all significant causes of such risk. The systems should evaluate the effect of foreign exchange rate changes on profitability and capital adequacy meaningfully, and accurately within the context and complexity of the banks’ foreign exchange activities.
5.3.2 Measurement systems should:
evaluate all foreign exchange risk by maturity, on both a gross and net
basis, arising from the full range of the bank’s assets, liabilities and offbalance sheet positions, including instruments with embedded or explicit foreign exchange options;
employ generally accepted financial models or methods for measuring
foreign exchange risk;
have accurate and timely data, in relation to exchange rates,
embedded options and other details on current FX positions;
enable banks to identify and measure accurately their foreign
exchange settlement risk incurred both intraday and overnight, and monitor settlement exposures in real-time (or close to real-time) in order to ensure that settlement limits will not be exceeded;
document the assumptions, parameters and limitations on which the
measurement systems are based. Material changes to assumptions should be documented, well supported and approved by senior management; and
include other relevant measures that the bank deems useful and
relevant in line with the complexities of its foreign exchange activities.
5.3.3 Apart from those foreign currencies with high volatility, if banks have material
exposures to currencies with low historical volatility, banks should also conduct stress tests on those exposures to measure foreign exchange risk. In setting the limits of those exposures, banks should consider the stress testing results, and should not rely solely on the historical volatility of the currencies.
5.3.4 Banks should have an accurate, informative and timely management
information system (MIS) for foreign exchange risk. This is essential to ensure that senior management and individual business line managers are well informed, as well as to facilitate compliance with relevant in-house policies.
5.3.5 The MIS reports should include indicators on market risk, as well as
operational risk arising from foreign exchange operations. Senior management should receive and review daily independent reports to ensure that these risks are prudently managed.
5.4 Control of Foreign Exchange Activities
5.4.1 Controls of foreign exchange activities may vary among banks, depending on
the nature and extent of their foreign exchange activities. However, the key element of a bank’s foreign exchange controls should govern the following:
organisational controls to ensure clear and effective segregation of
duties between those persons who approve foreign exchange transactions and those persons responsible for operational functions such as arranging settlement, exchanging and reconciliation of confirmations foreign exchange activities;
procedural controls to ensure that transactions are fully recorded in the
records and accounts of the bank, are promptly and correctly settled and that unauthorised dealing is promptly identified and reported; and
controls to ensure that foreign exchange activities are monitored
frequently against the bank’s foreign exchange risk, counterparty and other limits, and ensure that any breach of these limits should be promptly reported.
5.4.2 Banks should identify potential foreign exchange risks in new product &
services and activities; and ensure that these are subject to adequate procedures and controls before the introduction of these new products & services and activities. Furthermore, new activities may carry nonconventional risks and require substantial system changes and implementation costs to accommodate them. Such new activities should not be launched until the required systems are in place.
5.4.3 The use of hedging techniques is one means of managing and controlling
foreign exchange risk. However, banks may not need the full range of hedging techniques or instruments, therefore, banks must consider which hedging techniques are appropriate for the nature and extent of their foreign exchange activities, the skill and experience of trading staff and management, and the capacity of foreign exchange rate risk reporting and control system. Banks must also ensure that the financial instruments used for hedging meet their specific needs in a cost-effective manner.
5.4.4 New hedging or risk management initiatives that are not already covered by
the bank’s foreign exchange risk management policy should be approved in advance by the board, or the Asset and Liability Management Committee prior to implementation.
5.4.5 In assessing the effectiveness of hedging activities, banks must ensure that
the assessment is not solely based on the technical attributes of the individual transactions, but the overall risk exposure of the bank resulting from a potential change in asset-liability mix and other risk exposures such as credit, interest rate and position risks, is also considered.
5.5 Foreign Exchange Limits
5.5.1 Banks are required to establish explicit and prudent foreign exchange limits.
They should consider their current business strategies, liquidity/volatility of the individual currencies and loss exposure related to capital when setting the internal limits. At the minimum, a bank’s foreign exchange risk policy should include limits with respect to:
net open position by currency, and aggregate;
overnight net open position by currency, and aggregate;
maturity distribution of foreign currency assets, liabilities and contracts
individual customer and bank lines;
total FX contracts outstanding;
maximum loss by trader/desk/branch; and
credit limits for FX counterparties and settlement limits.
5.5.2 Foreign exchange risk limits need to be set within the bank’s overall risk
profile, which should reflect factors such as capital adequacy, liquidity, credit quality, investment risk and interest rate risk.
5.5.3 The Reserve Bank sets maximum limits on the following:
Overnight Single Foreign Currency Net Open Position;
Overnight Overall Foreign Currency Net Open Position; and
Over-the-Counter Foreign Currency Derivatives.
5.6 Measurement of Foreign Currency Net Open Positions
5.6.1 The calculation of foreign currency open position in a single currency should
be made by summing up the following items:
The net spot position (that is, all asset items less all liability items,
including accrued interest, denominated in the currency in question);
The net forward position (that is, all amounts to be received less all
amount to be paid under forward foreign exchange transactions, including currency futures and the principal on currency swaps not included in the spot position);
Guarantees (and similar instruments) that are certain to be called and
likely to be irrecoverable; and
Net future income/expenses not yet accrued but already fully hedged
(at the discretion of the reporting bank).
5.6.2 Foreign currency position can be either open or closed:
Where the amount of the bank’s assets and liabilities are equal in each
type of currency, the foreign currency position is considered as ‘closed’.
Where the amounts of the bank’s assets and liabilities are not equal in
each type of currency, the foreign currency position is considered as ‘open’.
5.6.3 By type of foreign currency, a bank’s single foreign currency open position can
be either ‘long’ or ‘short’:
Where the bank’s assets exceed its liabilities, within the same type of
foreign currency, an open position is considered as ‘long’.
Where the bank’s assets are less than its liabilities, within the same type
of foreign currency, an open position is considered as ‘short’.
5.6.4 The Reserve Bank adopts the internationally acceptable method of measuring
the Overall Foreign Currency Net Open Position, known as the Shorthand Position method, which measures the greater of either:
the sum of the Fiji dollar equivalent amount of each foreign currency
with a long position at the end of the day; or
the sum of the Fiji dollar equivalent amount of each foreign currency
with a short position at the end of the day.
5.6.5 Where a bank has long term or ‘structural’ asset or liability position in a
foreign currency, such as investments in subsidiaries, premises, loan capital etc., this must be reported in Form FC-1.
5.6.6 For the purpose of measuring the limits for open positions in foreign
currencies, Total Capital in Fiji is measured as set out in the Banking Supervision Policy Statement No 1, ‘Capital Adequacy Requirements for Licensed Financial Institutions’ and as reported in the bank’s latest Capital Ratio Return to the Reserve Bank. The figure for Total Capital in Fiji can be obtained from Part IV, Item A of the Capital Ratio Return.
5.7 Limits on Net Open Positions in Foreign Currencies
5.7.1 Banks are required to monitor and manage their end-of-day foreign currency
positions on a daily basis, to comply with the limits set out in section 5.7.2 below. At this stage, no formal limits are being imposed on intra-day positions in foreign currencies and each bank is required to manage its intra-day position in a prudent manner.
5.7.2 Banks are required to comply with the overnight foreign currency net open
positions limits specified below:
Limit on Single Foreign Currency Net Open Positions, irrespective of
short or long position, shall not exceed 12.5% of Total Capital in Fiji; or FJ$30.0 million, whichever is less.
Limit on Overall Foreign Currency Net Open Positions, using the
shorthand position method, shall not exceed 25% of Total Capital in Fiji or FJ$30.0 million, whichever is less.
5.7.3 The above limits are maximum limits; however, banks are required to comply
with its in-house policy limits where they are lower than the limits specified in this Policy.
5.7.4 Banks may sell any excess of foreign currencies to the Reserve Bank at end
of day to minimise foreign exchange exposure.
5.7.5 The Reserve Bank will review the maximum limits set out in para 5.7.2 from
time to time and may change or revoke the limits at any time by written notice to banks.
5.8 Limits on Over-the-Counter Foreign Currency Derivatives
5.8.1 Foreign currency derivatives include forwards, options and swaps. The
maximum limit, operational guidelines and reporting requirements for overthe-counter foreign currency derivatives are set out in the Guidelines for
Over-the-Counter Foreign Currency Derivatives Transactions issued by the Reserve Bank. Banks are required to comply with this Guideline at all times.
5.8.2 Banks are permitted to enter into foreign currency derivatives contracts with
each other, provided that:
6.8 For effective management of foreign exchange settlement risk, banks are
required to have, at the minimum:
a) develop and document appropriate foreign exchange risk management policies, processes and procedures for approval by the board; b) ensure that foreign exchange risk is managed and controlled within the approved foreign exchange risk framework4 ; c) establish prudent limits on the bank’s exposure to foreign exchange risk; d) identify the risks inherent to any new products and services, and ensure to have in place adequate procedures and controls before introducing any new foreign exchange product or service; e) develop and implement techniques to address the bank’s exposure to foreign exchange risk and its foreign exchange gains and losses; f) ensure effective segregation of duties between trading, risk measurement and monitoring, settlement and accounting functions; g) establish and implement procedures governing the conduct and practices of foreign exchange dealers; h) develop lines of communication to ensure timely dissemination of foreign exchange risk management policies, processes and procedures to officers involved in foreign exchange activities and foreign exchange risk management process; i) provide reports on foreign exchange activities and foreign exchange risk management to the Board, at the frequency as determined by the Board. However, senior management should inform the Board promptly should any large losses occur or are likely to occur from foreign exchange exposures; j) ensure that officers involved in foreign exchange operations have the necessary knowledge and expertise to undertake their duties; and k) ensure prompt responses to findings regarding any violations of established procedures and ensure that there are rigorous procedures to fully address any suggestions or queries made by the risk control units, internal or external auditors and the Reserve Bank of Fiji.
9.0 Role and Responsibilities of the Asset and Liability Management
Committee
9.1 Each bank should have an Asset and Liability Management Committee,
responsible for the design and administration of foreign exchange risk management. The role and functions of ALCO are described under BSPS 19 – Minimum Requirements for the Management of Market Risk for LFIs.
10.0 Independent Internal Audit
10.1 The Internal Audit Unit of each bank is required to conduct regular reviews of
the internal control and risk management process for foreign exchange risk (including settlement risk) in place, to ensure its integrity, accuracy and reasonableness.
10.2 At the minimum, the independent audit should review the bank’s foreign
exchange risk management activities to:
4 As part of the Market Risk Framework of the BSPS 19.
12.0 Balances Held by Banks in Foreign Currencies
12.1 Provided that all other relevant requirements of the Banking Act, Reserve
Bank of Fiji Act and Exchange Control Act and Notices are also complied with, for the purposes of Section 42(a) of the Reserve Bank of Fiji Act, banks are permitted to include in eligible end of day balances held in foreign currencies, amounts up to the limits set out in this Notice for:
12.1.1 maximum overall open positions in foreign currencies; and
12.1.2 balances placed on deposit offshore to cover the risk of undesirable
movements in foreign exchange rates during the term of forward foreign exchange sale contracts and for delivery on settlement date of the foreign currency amounts due under forward foreign exchange sales contracts outstanding.
12.2 Apart from the items in the preceding paragraph, and those components
which banks have historically been permitted by the Reserve Bank to be retained in foreign currencies (eg. foreign currency notes held for sale, minimum working balances maintained in Nostro accounts with banks offshore, and short term placements with banks offshore of amounts received by the bank in Fiji from approved foreign currency borrowings and deposits in eligible foreign currency deposit accounts of Non-residents and approved exporters), all surplus foreign currency must be sold to the Reserve Bank of Fiji by the close of business each day.
12.3 The Reserve Bank reserves the right at any time to review and revise the
approved limits for each bank and to withdraw approval for such amounts to be held in foreign currencies, at its discretion.
13.0 Reporting Requirements
13.1 Banks are required to compute and submit the following prudential reporting
returns to the Reserve Bank as at close of business each Wednesday:
PART 3: OVERSIGHT AND IMPLEMENTATION ARRANGEMENTS
14.0 Oversight by the Reserve Bank of Fiji
14.1 Each bank must provide to the Reserve Bank its Foreign Exchange Risk
Management Policy within 60 days after the implementation date of this Policy. Furthermore, each bank must provide a copy of the same whenever amendments are made, and this must be submitted to the Reserve Bank within 30 days of receipt of board approval on the changes.
14.2 The Reserve Bank will assess the compliance of each bank with the
requirements of this Policy in the course of its supervision.
14.3 A bank that fails to comply with her requirements of this Policy will be subject
to sanctions under Section 15 of the Banking Act 1995.
14.4 The Reserve Bank may adjust or exclude a specific requirement in this policy
statement by providing written notice.
15.0 Implementation Arrangements
15.1 This Policy applies to all banks licensed under the Banking Act 1995, and
shall be effective from 1 June 2025, and will be reviewed as deemed necessary. Reserve Bank of Fiji 31 December 1996 July 2016 (Revised) April 2025 (Revised) Attachment:
Schedule – Interpretation
Appendix 1 – Reports Templates
SCHEDULE 1
Interpretation-
(1) Any term or expression used in this Notice that is not defined in this Notice:
(a) which is defined in the Act, shall, unless the context otherwise requires, have the meaning given to it by the Act; and; (b) which is not defined in the Act and which is defined in any of the Reserve Bank of Fiji Policy Statements shall, unless the context otherwise requires, have the meaning given to it by those policy statements; (2) In this Notice, unless the context otherwise requires:
‘Act’ means the Banking Act 1995 unless otherwise specified. ‘Foreign Exchange Risk’ means the risk of financial loss to a bank arising from adverse movements in foreign exchange rates. ‘Foreign Exchange Settlement Risk’ the risk of financial loss to a bank when it pays the currency it sold but does not receive the currency it bought in a foreign exchange transaction. ‘Foreign Currency’ means a currency other than the legal tender of Fiji. ‘Foreign Currency Open Position’ means for an individual foreign currency, assets denominated in that currency minus liabilities denominated in that currency. A foreign currency position of zero is referred to as a closed foreign currency position. A positive or negative foreign currency position is referred to as an open foreign currency position. ‘Intra-day’ means between the opening of any business day until the close of business of that same day. ‘Long Position’ means an open currency position for an individual currency where assets denominated in that currency exceed liabilities denominated in that currency, plus the impact of off-balance sheet items. ‘Overall Foreign Currency Open Position’ means the higher in absolute terms of either the sum of all short foreign currency positions or the sum of all long foreign currency positions. ‘Overnight Net Open Position’ means the holdings of any net open positions in foreign currencies of a bank at the close of each business day. ‘Short Position’ means an open foreign currency position for an individual foreign currency where liabilities denominated in that currency exceed assets denominated in that currency, plus the impacts of off-balance sheet items. ‘Shorthand Position Method’ means the procedure for measuring the overall foreign currency exposure by:
a) adding separately all short positions on one side and all long positions on the other side; b) comparing the two totals; and
c) take the larger of the two totals as the Overall Foreign Currency Open Position. ‘Total Capital in Fiji’ is measured as set out in the Banking Supervision Policy Statement No 1, ‘Capital Adequacy Requirements for Licensed Financial Institutions’ and as reported in the bank’s latest Capital Ratio Return to the Reserve Bank. The
figure for Total Capital in Fiji can be obtained from Part IV, Item A of the Capital Ratio
Return.
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This document supersedes: Minimum Requirements for the Management of Foreign Exchange Risk for Licensed Commercial Banks
Source: Reserve Bank of Fiji — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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