Counter Party Limits For Fx Dealings

ISLAMI BANK BANGLADESH LTD INTERNATIONAL BANKING WING FOREX TREASURY DIVISION HEAD OFFICE, DHAKA E.C MEMO: March 16, 2009

Date:

Re: Proposal for approval of market risk and counterparty investment (credit) risk related limits for real time management of Bank’s funds in the financial markets. The functions of the Dealing Room are directly related to Local & Global Financial Market. So, the risk of the Dealing Room originates from the activities for performing transactions/deals on behalf of the clients (merchant trading-Export, import & remittances), currency trading, risk of our own Nostro balances & balance sheet operation and counterparty default risk and to ensure profitability managing risk in the financial markets operation. Due to ongoing global economic recession/crises, the Financial Market is very much volatile. Considering organizational size, needs, the higher Market & credit risk appetite in the financial market, we have rationalized the market risk & credit risk related limit to avoid any unexpected losses/situations from Foreign exchange dealing operations. 1. Market Risk management: Market risk, in simplest terms, is price risk or exposure to adverse price change against the positions/buys or sell of foreign currency to /from customers or other banks by dealers which may seriously implication for the cash follow of the Bank.. To limit the unlimited market risk against adverse currency position, the dealing room is allowed the following limits considering the proper allocation of a portion of equity of the Bank. The Bank is establishing a Daylight limit, Stop loss limits, Overnight limits, and VAR limits and MAT that each trader or group can carry on a particular day. A.

Daylight/Intraday Limits: The Daylight limit is allowed for maximum open position

that can be taken during the course of the trading session by dealers/group. In million USD Sl

Name of limit

Dealing

Chief

Dealers

01

Overall

Day

room USD 30

Dealer USD 15.00

USD 10

. 02

(Including FC/BDT) Daylight limit ( Excluding FC/BDT)

USD 10

USD 5.00

USD3.00

. 03

per day Deal Size (including FC/BDT)

--

USD6.00

USD 4.00

. 04

Deal size (Excluding FC/FC)

--

USD 2.00

USD 1.20

.

Daylight

limit

per

Strategy for Daylight limit:

•

The Daylight limits applied subtracts the initial allocation of each position and then makes adjustments when the position is closed out.

•

The daylight limit allows considered to be as the core

•

10% risk amount to be kept per deal as risk amount on daylight limit and subsequent risk amount to be calculated on the residual balances of daylight limit.

•

Daily volatility should be calculated on each day before entering into trade.

•

After the trading session stipulated in the Treasury Manual, all outstanding deals shall have to be within the overnight limit fixed by the management.

B. After Hour Dealing Limit & Off premises Dealing: When as usual trading session upto 5. PM is ends, after hour dealing is calculated. Due to different time zone, Dealers are to do deal with exchange houses/Banks and squiring up the outstanding deals after the trading session. As such, to facilitate the merchant trading especially remittances from UK,USA,Canada etc,Dealing Room is allowed following after hour Dealing limits for the Dealing Room only. Sl 01

Name of limit After hour/off premises limit

Dealing

Chief

Dealers

room USD .50

Dealer USD .20

USD .10

. Strategy for after hour/off premises limits management:

•

All deals done with exchange houses/ Banks have to be covered from highrt volatile currency to mostly stable currency instantly to avoid risk and position Management.

•

All Off premises dealing alloed only for cover for exchange houses/Bank subject to instant converted /hedge to stable currency

•

All Off premises/Ater hour deals have to be market at Deal slip with RED INK.

•

Fresh Currency Dealing not allowed & All Outstanding Currency dealing may be squired with due record.

B. Overnight Limit:

At the end of each day’s trading session/intraday/daylight, all

outstanding deal has to be under the overnight limit including the assets/liabilities created at branch -end/pipe line transactions as allowed below: Sl

Name of limit

Dealing

Chief

Dealers

01

Overall Overnight limit

. 02

Overnight

.

USD/BDT)

limit

(

Excluding

room USD 8.00

Dealer USD 3.00

USD 1.00

USD 2.00

USD 1.00

USD 0.20

Risk Management strategy for Overnight limit:

•

Currency Wise Overnight limit have to be spited among different currency pair by authority.

•

Overnight Position is to be kept considering the Volatility (Price Movement) of the currencies to minimize the risk of significant the loss.

•

The dealers shall have to ensure to keep the overall limit within the open position limit of the Bank.

•

All pipe line transactions/transit are to be carefully handled to keep the Dealing room limit also within the BB prescribed limits.

•

C. Value at Risk Limit (VAR):

Only daylight limit alone are not enough. A big open position in a volatile currency represents a much bigger risk relative to profit on a exposure in a relatively stable currency. The VAR uses on overall Portfolio of the Bank’s Exchange position/assets-liabilitiesAs such Bank dealing in foreign currency put limits, not only on the overall volume of the foreign exchange Position but also on the potential losses over night, which may estimate through VAR. Sl 01. 02.

Name of limit Overall Value at Risk Limit Value at Risk for Currency Trading

Dealing room BDT 4.00 million BDT 1.00 million

Risk Management strategy for VAR limit: •

Since the VAR measures the Possible, The Back office should be calculated Back testing to Compare Actual overnight happening with that of VAR and report to the Management

•

It represents the Overall Marl to Market loss on the portfolio on particular day which should not exceeds beyond the VAR limit fixed above.

D. Stop loss limit: Bank can not afford unlimited losses against Fx deals on a particular day or each position. To limit the risk of loss, Bank allows applying cut loss limit against position on each day or deal. Sl

Name of limit

Dealing

Chief

Dealers

01.

Stop loss limit per day

room USD 30000

Dealer USD

USD

02.

Stop loss limit per Deal

--

15000.00 USD

10000.00 USD

1500.00

1000.00

04.

Management action trigger

Risk Management strategy for Stop Loss limit: •

The stop loss limit for Dealing room, Chief Dealer & Dealers should not be exceed beyond 1% of the Risk amount of the Daylight limits.

•

Dealing shall have to set up Risk reward ratio at 2:1 for each position to keep the per deal stop loss limits within the limits.

D. Management Action Trigger: The management action trigger is a trigger level to warn of a persistently loss making position or abnormal profit making positions. It is calculated on rolling monthly profit for 21 business days. Sl 03.

Overall

Name of limit Management action

05.

trigger) Management action trigger for Currency trading

days revenue Do

06.

(Loss Trigger) Management action trigger for Currency trading

Abnormal profit on a

trigger

(Loss

(profit trigger)

•

Management Average profit of latest 21

particular day above average

When a MAT (Loss) is exceeded, trading management must review the current position and decided whether it should be maintained, reduced or closed out.

•

Any unexpexted/abnormanl profit have to be informed to the Management instantly with due explanation.

2. Counterparty Credit Risk Management: •

Credit risk involves inability or unwillingness of a customers or Counterparty to meet commitments in relation to funding/lending/investments, currency trading, hedging, settlements and other financial transactions. It may be done for External & Internal factors.

•

Credit risk ,inherent, in all banking activities, arises from the possibility that the counterparty to a FX dealings can not/will not make the agreed payments of value date/maturity date against FX deals confirmations.

•

When an institutions provide credit whenever took, it expect to be repaid.However, It may arises when clients/Banks Counterparty becomes insolvent or FX or other control imposed by Government authority.Sovernity risk

to

minimize

the

funding

risk.

/arises

for

default

of

other

Banks/counterparties for unable to perform its obligations. i.e. default or dispute risk.

•

The counterparty creditworthiness & adjusted to change in the financial circumstances in the Financial Marker by the Bank. The Credit risk may be settlement or pre-settlement risk.

AS such To minimized the Credit Risk,it is Categorized as Category A limit & Category – b limit to avoid any unexpected situations in the ongoing financial crises and real time management & follow up on Fund. 2. a Category –a limit : Category –A limit are allows are those counterparties with whom we have deposit/investment in foreign currencies and any unexpected situation in the financial market may expose the bank at high risk of loss. As such it has been bought under Category –A limit. (ANNEXURE-1) 2. B Category –B limit: Category –B: The limit allows to those with have we have Foreign exchange dealing with counter values i.e every deal is covered by counter-value. As such only settlement risk are involved. However, If any Currency deals can not/is not settle at value date with the Counterparty, against which we have already delivered deal proceeds, the part of the transaction will be under Category –A limit until its settlements. (ANNEXURE-2)

• •

Total settlement Limit: allowed for settlement /value date baiss and takes exposures upto the allowed limit at any trade date for different settlement date. Transaction exposure limit: Such limits are allowed for low grading Banks and trade date bassi.Untill settlement of the deal at value today or Tom or Spot, further deals/exposures can not be taken.

3.00 Limits for Dealing with Corporate Sl 01.

Category of Corporate In-house Corporate

Limits As per limit allowed by IBW,PRD,GID as Investment limit (Mode wise) except the

02.

Inter-Bank

Corporate

(Through

03.

Bang) Direct dealing with Corporate

cash retirements. AS per Category –B limit fixed for Banks) AS per CRG & Previous Business Track record

4.0 Money Market Dealing : Due to limited scope and few number of products ,Islamic Bank is now dealing with money the following two way

•

Foreign Currency Money Market Dealings 1. Placement/Nostro funding 2. Investment with Islamic Development Bank(IDB)/Bahrain Islamic Bank etc

•

Local Currency Money Market Dealings for Banks & NON Bank FIS : 1.

Placement to Mudabarah saving A/C with Other Islamic bank/Windows

2. Mudarabaha Term Deposit with Other Islamic Bank/windows 3. Bangladesh Govt.Islamic Investment Bonds. Limits for the Foreign Currency & Local Currency Money Market dealing for Banks & Non Bank Financial shall be determined on case to case basis after receiving proposal from counterpart and appropriate credit rating as per CRG and financial highlight of the concerned Banks or NBFIs. In view of the above, we feel that the rationalization of limits may help to capital charge against Market Risk & credit Risk as per Basel-2 and arrange overall control of Banks Foreign Exchange Portfolio of the Bank. The issue is now placed before the Executive Committee for their kind perusal and approval. If agreed, the following resolution may be adopted: “Resolved that the proposal for fixing of different foreign Marker risks & Counterparty credit risk related limits as envisaged in the memo is perused and hereby approved for 01(One) year from the date hereof on revolving basis with advise to ensure real time management of funds.

(Md.Fariduddin Ahmed)

Managing Director ANNEXURE 1 In million (Currency Wise) Sl Name of the Bank 01. 02. 04. 05. 06.

Standard Chartered Bank

City

Country

Newyor k

USA

Currency USD

CitiBank NA, NY, USA

USD

Mashreq Bank, NY, USA

USD

HSBC Bank, NY, USA

USD

Commerz Bank, AG, Germany

USD

Lim

07. 08. 09. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Sl 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39.

Korea Exchange Bank,Seoul, Korea

USD

Habib American Bank, NY, USA

USD

Sonali Bank,UK, London

USD

JP Morgan Chase Bank, NY, USA

USD

Habib Bank, Zuich

USD

Wachovia Bank,NA, NY, USA

USD

UBAF Bank Hongkong

USD

ICICI Bank, Hongkong

USD

United Overseas Bank, Singapore

USD

SCB/AEBL,Kalkata

ACUD

Sonali Bank, Kolkata, India

ACUD

Arif Habib Rupali Bank,Karachi, Pak.

ACUD

Peoples Bank, Colombo, Srilanka

ACUD

A.B Bank, Mumbai, India

ACUD

State Bank of India, Kolkata, India

ACUD

Nepal Bangladesh Bank, Nepal Standard Chartered Bank, India

ACUD ACUD

Name of the Bank

City

Country

Currency

Standard Chartered Bank, Karachi,Pak.

ACUD

Bank of Bhutan, Bhutan

ACUD

Bank Saderat, Iran

ACUD

CitiBank NA, Mumbai,India

ACUD

ICICI Bank, Mumbai, India

ACUD

Mashreq Bank, Mumbai, India

ACUD

HSBC Bank, Mumbai,India

ACUD

HSBC Bank, Karachi, Pakistan

ACUD

Bank of Novosktia, Canada United Overseas Bank, Singapore

CAD SD

Lloyds TSB Bank, UK, London

GBP

JP Morgan Chase Bank, London

GBP

Habib Bank Zurich AG London

GBP

Sonali Bank,UK, London

GBP

Commerz Bank AG, Germany

EURO

CitiBank Ag, Germany

EURO

Lim

40. 41. 42. 43. 44. 45. 46. 47.

Unicredito Italiano, Italy American Express Bank, AG, Germany

EURO

Banco Popolare De, Verona, Italy

EURO

Sonali Bank,UK, London

EURO

Dresdner Bank AG FF

EURO

EURO

Al Raji Banking Inv.Corp., K.S.A Bank of Tokyo Mitsubishi, Tokyo, Japan

SAR

Zurcher Kantonal Bank, Switzerland

CHF

JPY

ANNEXURE-2

SL

In million USD Bank

A..

Bangladesh Bank

B.

Foreign Banks

Location

TSL(Total settlement limit)

City

Country

Dhaka

Bangladesh

20.00

01 .

CitiBank Na

Dhaka

Bangladesh

10.00

02 .

HSBC Bank

Dhaka

Bangladesh

8.00

03 .

Standard Chartered bank

Dhaka

Bangladesh

10.00

04 .

Commercial Bank of celyon

Dhaka

Bangladesh

3.00

05 .

Bank AL Falah

Dhaka

Bangladesh

2.00

06 .

Habib Bank,Pakistan

Dhaka

Bangladesh

07 .

National Bank of Pakistan

Dhaka

Bangladesh

08 .

State Bank of India

Dhaka

Bangladesh

2.00

C.

State owned Bank

01 .

Sonali Bank

Dhaka

Bangladesh

10.00

02 .

Agrani Bank

Dhaka

Bangladesh

8.00

To

03 .

Janata Bank

Dhaka

Bangladesh

8.00

04 .

Rupali Bank

Dhaka

Bangladesh

2.00

D.

Specialized banks

01 .

Krishi Bank

Dhaka

Bangladesh

3.00

02 .

Shilpa Bank

Dhaka

Bangladesh

2.00

03 .

BASIC

SL

Bank

3.00

Location City

Country

TSL(Total settlement limit)

Islamic Bank 01

Al Arafa

Dhaka

Bangladesh

3.00

02 .

ICB Islamic Bank

Dhaka

Bangladesh

03 .

Shajalal

Dhaka

Bangladesh

2.00

04 .

Social

Dhaka

Bangladesh

2.00

05 .

First Security

Dhaka

Bangladesh

06 .

EXIM

Dhaka

Bangladesh

4.00

C.

Private Commercial Bank

01 .

AB Bank

Dhaka

Bangladesh

5.00

02 .

Bank Asia

Dhaka

Bangladesh

4.00

03 .

BRAC

Dhaka

Bangladesh

2.00

04 .

Dhaka Bank

Dhaka

Bangladesh

4.00

05 .

Dutch Bangla

Dhaka

Bangladesh

2.00

06 .

Eastern Bank

Dhaka

Bangladesh

3.00

To

07 .

IFIC

Dhaka

Bangladesh

2.00

08 .

Jamuna

Dhaka

Bangladesh

2.00

09 .

Mercantile

Dhaka

Bangladesh

3.00

10 .

Mututual Trust

Dhaka

Bangladesh

2.00

11 .

NBL

Dhaka

Bangladesh

3.00

12 .

NCC

Dhaka

Bangladesh

3.00

13 .

One

Dhaka

Bangladesh

1.00

14 .

Prime Bank

Dhaka

Bangladesh

5.00

15 .

Premier Bank

Dhaka

Bangladesh

2.00

SL

Bank

Location City

Country

TSL(Total settlement limit)

16 .

Pubali Bank

Dhaka

Bangladesh

3.00

17 .

Southeast Bank

Dhaka

Bangladesh

4.00

18 .

Standard Bank

Dhaka

Bangladesh

2.00

19 .

The City Bank

Dhaka

Bangladesh

3.00

20 .

Trust Bank

Dhaka

Bangladesh

2.00

21

UCBL

Dhaka

Bangladesh

2.00

22 .

Uttara Bank

Dhaka

Bangladesh

2.50

23 .

Bangladesh Commerce Bank

Dhaka

Bangladesh

--

Frankfurt

Germany

10.00

Overseas Bank/Branch 01 .

Commerz Bank

To

02 .

Mashreq Bank

03 .

The Bank of Nova scotia

04 .

ICICI

05 .

CitiBank Na

Dubai

UAE

5.00

Hongkong

Hongkong

5.00

India

India

3.00

Singapore

Singapore

5.00