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6.  Counterparties

A.  Approved Counterparties

Guideline 8

The policy document must identify the counterparties with whom the department may undertake foreign-exchange transactions and/or hold foreign-currency bank accounts. The minimum credit rating for a counterparty is A- / A3 (subject to the exceptions outlined in paragraph 48 of this document). Counterparties that do not meet the criteria may be included only with the prior approval of joint ministers.

Definition

  1. A counterparty is a bank with which departments may undertake foreign-exchange transactions and/or hold foreign-currency bank accounts (domiciled in New Zealand or overseas).

  2. The NZDMO is also a counterparty for foreign-exchange transactions, including term deposits (refer to Schedule II for dealing with the NZDMO).

  3. Credit risk refers to the risk of loss due to the failure of a counterparty to fulfil its financial obligations.

Policy

  1. Departments are required to transact and hold bank accounts only with those counterparties whose long-term debt credit rating is A – (as assigned by the Standard and Poor’s), or A3 (as assigned by the Moody’s Investors Service) or higher. When the counterparty is rated differently by the two agencies, the lower rating prevails. If the counterparty does not have a long-term rating, a minimum short-term rating of A -1 /Prime-1 is required (refer to paragraph 57 of these guidelines on how to check the credit rating of an institution).

  2. The two exceptions for foreign-currency bank accounts are:

    • where there are no banks in the country that meet the credit criteria; and

    • where, by government regulation in the host country, the department has to bank with a specific (usually government) bank.

  3. The counterparties with which departments may transact or hold foreign-currency bank accounts must be documented in an appendix to their Foreign-Exchange Policy Document. It is important to note that inclusion of a counterparty in a department’s policy document does not constitute authority to open a foreign-currency bank account (refer section 7 for further information).

  4. Departments are responsible for managing their transaction and banking relationships. In the case of foreign-currency bank accounts, departments should exercise judgement and caution and their own regional knowledge in dealing with overseas banks.

B.  Counterparty Exposure Limit

Guideline 9

The policy document must state the Counterparty Exposure Limit for each individual counterparty. The Counterparty Exposure Limit for an individual counterparty must not exceed NZ $5 million.

Definition

  1. The Counterparty Exposure Limit refers to the maximum transaction exposure a department can have to a counterparty, expressed as a New Zealand-dollar equivalent. It is considered an overnight limit and should be checked daily where transactions occur frequently and at least once a month where transactions are infrequent.

  2. A department’s total net transaction exposure to an individual counterparty includes; foreign-currency bank account balances plus spot transactions plus forward-exchange contracts calculated across all currencies and converted to New Zealand-dollars.

Policy

  1. The Counterparty Exposure Limit for an individual counterparty is NZ $5 million. This limit does not apply when the counterparty is the NZDMO or the Reserve Bank of New Zealand. In these instances, departments may have unlimited exposures.

  2. The Counterparty Exposure Limit is set so that credit risk can be managed prudently and credit exposures can be diversified across counterparties where necessary.

  3. If the total net transaction exposure to an individual counterparty is above the Counterparty Exposure Limit, it is the responsibility of the department to cover this risk either by reducing the bank account balance or, where possible, negotiating out of an existing arrangement.

C.  Monitoring Credit and Exposure Limits

Guideline 10

The policy document must specify how frequently counterparty credit ratings and exposure levels are to be checked. It must state that, where an approved counterparty is subsequently downgraded to a rating that is below the minimum level (A- / A3), the department will be required to cease trading and/or close their bank account with that counterparty, unless joint ministerial approval has been granted to keep the account open.

Policy

  1. Departments are responsible for monitoring their counterparty credit ratings and exposure levels and for ensuring compliance with these guidelines and their policy document.

  2. Counterparty credit ratings should be checked regularly (i.e. quarterly). This is particularly important where departments have exposures to counterparties at the lower end of the rating scale, i.e. A- / A3. Information on credit ratings can be obtained from the respective rating agencies’ websites: www2.standardandpoors.com and www.moodys.com (departments can register with them online, free of charge). Other sources of information include the Reserve Bank of New Zealand’s website www.rbnz.govt.nz, which provides credit ratings for registered banks in New Zealand. The NZDMO can also provide assistance where required.

  3. Where an approved counterparty is subsequently downgraded to a rating that is below the minimum level (A- / A3), the department will be required to cease trading and/or close their bank account with the counterparty as soon as practicable. Any exceptions to this will require joint ministerial approval and should be sought in writing via the department’s Treasury Vote Team.

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