Regulation Setting, Calculating and Maintaining Overall Open Foreign Exchange Position Limit of Commercial Banks

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1 Regulation Setting, Calculating and Maintaining Overall Open Foreign Exchange Position Limit of Commercial Banks Approved: under Decree No. 201 of July 20, 2006 of President of the National Bank of Georgia Amended by: Decree No 290 of October 20, 2006 Article 1. General Provisions 1. The goal for determining overall open foreign exchange position limit by the NBG shall be to reduce possible risks resulting from foreign exchange transactions, in the case of possible exchange rate movements. Such movements may have a negative impact on profit, capital, liquidity and solvency of commercial banks. 2. Foreign exchange position shall represent the difference between the bank s assets and liabilities formed in foreign exchange. 3. When calculating the reported foreign exchange position, all reported assets existed in foreign exchange shall be included in the bank s assets, while in liabilities - all reported liabilities existed in foreign exchange. 4. When calculating the off-balance sheet foreign exchange position, the sum of foreign exchange contracts on purchase of foreign exchange shall be included in the bank s assets, while in liabilities - the sum of foreign exchange contracts on sale of foreign exchange. 5. When calculating the consolidated foreign exchange position, all reported assets existed in foreign exchange and the sum of foreign exchange contracts on purchase of the same foreign exchange shall be included in assets of each foreign exchange, while in liabilities - all reported liabilities existed in foreign exchange and the sum of foreign exchange contracts on sale of the same foreign exchange. 6. The Foreign exchange position can be either open or closed: a) Where the amounts of the bank's assets and liabilities are equal in each type of currency, the foreign exchange position shall be considered closed; b) Where the amounts of the bank's assets and liabilities are not equal in each type of currency, the foreign exchange position shall be considered open; 7. By types of foreign currency, a bank's open foreign exchange position can be either long, or short: a) Where the bank's assets exceed its liabilities, within the same type of foreign currency, an open foreign exchange position shall be considered long; b) Where the bank's assets are less than its liabilities, within the same type of foreign currency, an open foreign exchange position shall be considered short;

2 8. A bank's overall open foreign exchange position represents the largest amount of the totals of long and short open foreign exchange positions for all types of foreign currency. 9. Foreign exchange contracts shall include commitments on purchase or sale of foreign currency under Spot, Futures, Forward, and Swap agreements, and the rights and commitments under the Options, including amounts. 10. For the purpose of this Regulation, the foreign exchange contracts describing foreign exchange transactions shall have the following definitions: a) Spot - a transaction involving a foreign exchange trade at the current market spot rate, on condition of immediate settlement; b) Currency Futures - a term deal on foreign exchange trade, occurring on the exchange market, at the price fixed, as of the moment, the deal is made, on the condition to implement the transaction after a certain period of time. c) Currency Forward - a term deal in foreign exchange trade, occurring out of the exchange market. d) Currency Swap - two foreign exchange deals between two participants, made in the same currency and at one and the same time (during the course of one business day), but with different delivery dates and different exchange trade rates; e) Currency Option - the right to trade foreign currency, granted to the relevant party under the contract; should the party exercise such right, the other party involved shall assume the obligation to satisfy the counterpart 11. Foreign Exchange can be traded in any form (directly by the bank, on a contractual basis, or through currency exchange bureaus, directly with the bank's clients or in domestic and external markets). Article 2. Overall Foreign Exchange Position Limit and Its Calculation 1. The overall open foreign exchange position limit, in all currency types, shall be established separately, according to the balance sheet accounting as well as the consolidated foreign exchange positions, respectively, at the amount of 20% of the regulatory capital calculated in accordance with the rules set forth by the National Bank of Georgia. 2. When calculating the overall open foreign exchange position of the balance sheet accounting, the largest amount between the sums of the balance sheet long and short open foreign exchange positions in all currency types shall be taken, which shall not exceed 20% of the bank's regulatory capital. 3. When calculating the bank s consolidated overall open foreign exchange position, the largest amount between the sums of the consolidated (reported and off-balance sheet) long and short open foreign exchange positions in all currency types shall be taken, which shall not exceed 20% of a bank's regulatory capital. 4. For the purpose of daily compliance with set limit with regard to the overall open foreign exchange position, the bank shall be obliged to calculate the balance-sheet, off-balance sheet and consolidated overall open foreign exchange

3 positions on a daily basis in accordance with Annex 1 and ensure maintenance of their limits during the day (from the beginning of an operational day until its end). 5. In the case of violating an overall open foreign exchange position limit, a bank shall be obligated immediately or, in emergency cases, until the end of an operational day, carry out balancing currency transactions for the purpose of restoring the violated limit. Article 3. Accounting of Foreign Exchange Trade Transactions 1. Accounting of foreign exchange transactions shall be conducted in compliance with the "Chart of Accounts and Related Description Manual for Commercial Banks". 2. The accounting of foreign exchange transactions shall be carried out according to the official rate of exchange, fixed by the National Bank of Georgia. 3. Following movements in the official rate of exchange, Foreign Exchange Position Accounts shall be subject to conversion. The results of such conversion of Foreign Exchange Position Accounts shall be recorded on the Foreign Exchange Position Counter-value Accounts and respectively, in the profit-and loss accounts. 4. Balances recorded on all Foreign Exchange Position Counter-value Accounts on the bank's balance sheet, as well as balances in each foreign currency on all Foreign Exchange Position Accounts, shall be subject to netting. As a result of such netting, the amount sitting in the Foreign Exchange Position Counter-value Account #2601 shall be equal to the amount sitting in the Foreign Exchange Position Account # The foreign exchange transactions to be conducted, as well as related contracts, including their amounts, shall be recorded on respective off-balancesheet accounts in compliance with "Chart of Accounts and Related Description Manual for Commercial Banks". The difference between the amounts of contracts involving trade of each type of foreign currency shall be included in the calculation of an open foreign exchange position for each foreign currency. Article 4. Responsibilities of Management of Commercial Banks To ensure the normal functioning of their banks, the commercial bank managers shall be obligated to: 1. Determine the main objectives and directions for the bank's foreign exchange activities, which shall include the following: types of transactions allowed by law, different types of services, developing reporting forms, and internal control, etc.; 2. Take control over foreign exchange risk by means of foreign exchange risk limits and a monitoring system; 3. Develop a foreign exchange risk management policy, which shall include: a) Procedures and mechanisms for administering foreign exchange activities; b) Bank's participation in the foreign exchange market and the flexibility of the bank management to changes in the foreign exchange market;

4 c) Hedging strategy; d) Accountability and responsibility for making decisions on managing foreign exchange risks; e) Timely implementation of the planned work, and maintaining records of deals completed in bank journals and accounting documents; f) Ability to adjust the management system for foreign exchange transactions and foreign exchange risk, on the basis of the analysis of the economic environment of foreign exchange activities; g) Settlement risk management system during foreign exchange transactions; h) Management and monitoring system for those assets and liabilities in each foreign exchange whose maturity dates coincide; i) Analyses of foreign exchange contracts; j) Set daily open foreign exchange position limits for each type of currency in the course of which the requirements set under this regulation for overall open foreign exchange position limits shall be considered; k) Set open foreign exchange position limits for branches for each type of currency. 4. Discuss the developed foreign exchange risk management policy and procedures on periodic basis and, if needed, ensure revision thereof; 5. Provide respective foreign exchange risk bearing divisions with staff who acknowledge: a. the essence of the risk with regard to foreign exchange market transactions; b. factors that have impact on foreign exchange risks; c. other risks that accompany transactions that are carried out at foreign exchange markets. 6. Provide the relevant staff with regulations on the conduct of foreign exchange transactions, describing their rights, duties, and responsibilities, as well as the directions of their activities and types of reporting; 7. Periodically control the observance of requirements of this Regulation through the Internal Audit Department, and monitor the compliance with the rules and procedures set by the bank's internal policy for foreign exchange risk management. Article 5. Obligations of Commercial Banks Commercial banks shall be obligated: a) Maintain internal regulations and instructions governing the conduct of foreign exchange transactions, which shall reflect the distinctions between the staff directly involved in foreign exchange transactions and the accounting staff;

5 b) Provide daily monitoring of the bank s overall open foreign exchange positions to define their compliance with the set limits and, in the event of identifying any excess, present the report to the bank management to settle it; c) Keep the foreign exchange management information system through which the bank will carry out both the monitoring over daily changes in foreign exchange rates and, on periodic basis, stress-testing of the banks financial data with regard to its profit and loss to define the impact of the foreign exchange rate movements on the bank s capital and liquidity; d) Keep complete records of foreign exchange transactions and data; e) Keep all exchange rate records used for foreign exchange transactions f) Provide daily calculation of open currency positions by type of currency, in accordance with the Daily Reporting Form for an Overall Open Foreign Exchange Position - Attachment 1; g) Along with the Regulatory Report, submit to the National Bank on a monthly basis, the Monthly Reporting Form for the overall open foreign exchange position - Attachment 2; as well as the daily report for the last day of the month - in the format of Attachment 1. Article 6. Sanctions In the event of violating the overall open foreign exchange position set under Article 2 of this Regulation NBG shall impose on, and charge commercial banks pecuniary penalties according to the set rules and amounts.