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Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure

SCHEDULE IV: Outline for a Foreign-Exchange Policy Document

Introduction

  1. In preparing a policy document for the management of foreign-exchange transaction exposure, departments may wish to use the following outline of contents:

Standing of this policy

  1. This policy document has been drawn up in terms of the decision reached by the Cabinet State Agencies Committee on 24 January 1990. This decision required each Ministry and Department to produce a Foreign-Exchange Policy Document for the management of their department’s transaction exposure (both Crown and departmental cashflows).

  2. These policies have been agreed between the Secretary to the Treasury and the Chief Executive (or where applicable joint Ministers) and are binding on the department. The Chief Executive is charged with the responsibility of ensuring that the department operates within the provisions of these policies. Changes to, or deviations from, these policies may only be made by agreement between the Secretary to the Treasury and the Chief Executive, where they conform with the ‘Guidelines for the Management of Departmental Foreign-Exchange Exposure (November 2003); or the Minister of Finance and the Responsible Minister where they do not. This policy document is subject to the provisions of the Public Finance Act 1989 and Treasury Instructions.

Foreign-Exchange Objectives

Guideline 1

The policy document must state the department’s foreign-exchange policy objectives.

  1. The objective is to ensure that the risk faced by the department due to transaction and counterparty exposure is minimised. The department will act to minimise this risk by entering into transactions to cover all material foreign-exchange transaction exposures created in the normal course of their business. This will be achieved by identifying and covering transaction exposures on a timely basis and limiting exposure to any single financial institution (refer to page 6 of the guidelines for examples).

Foreign-Exchange Exposure Faced by the Department

Guideline 2

The policy document must describe the types of foreign-exchange exposure faced by the department.

Accountabilities and Responsibilities

Guideline 3

The policy document must list the delegated authorities and key responsibilities for foreign-exchange exposure management within the department.

  1. Organisation Chart – departments should include an outline of the department’s structure with an emphasis on the reporting lines between the foreign-exchange function and the rest of the department.

  2. Key Responsibilities - departments should include here a list of responsibilities and the hierarchy of authorities, which will apply within the department.

  3. Segregation of Duties – departments should demonstrate there is an appropriate standard of controls and segregation of duties.

Identification and Timing of Cover

Guideline 4

The policy document must state the point or points at which identification and covering of transaction exposure will occur.  Where more than one identification point is stated, the policy should define the circumstances under which each is applicable.

Covering Transaction Exposure

A.  Transaction Exposure Limit

Guideline 5

The policy document must state the Transaction Exposure Limit for each individual currency. The Transaction Exposure Limit for an individual currency must not exceed NZ $100,000.

B.  Approved Instruments

Guideline 6

The policy document must identify the instruments which the department may use to cover its transaction exposure, together with any limitations on their use. Such limitations should include:

  1. i.     maximum utilisation of a particular instrument without reference to the Chief Executive;

  2. ii.     specific approval from the Chief Executive required to use a particular instrument; and

  3. iii.    use of particular instruments to cover specified types of transactions.

C.  Historic-Rate Rollovers

Guideline 7

The policy document should state that the department is prohibited under the Public Finance Act 1989 from rolling forward an existing foreign-exchange contract at a historic rate.

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.

  1. It should be stated that 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 Investor’s 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.

  2. The counterparties with which departments may transact or hold foreign-currency bank accounts should be documented in an appendix to their Foreign-Exchange Policy Document, together with any conditions of use.

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.

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.

Bank Accounts

Guideline 11

The policy document must comply with the requirements of the banking and investment provisions contained in the Public Finance Act 1989.  These include:

  • Treasury approval is required to open/ amend or close a bank account;

  • a foreign-currency bank account cannot be operated until a Direction for Foreign-Currency Bank Accounts or a Notice of Delegation Regarding Crown Bank Accounts has been received from the Treasury;

  • a foreign-currency bank account cannot be overdrawn;

  • interest received on a foreign-currency bank account must be returned to the Crown; and

  • departments cannot invest any money held in a Crown or a departmental bank account.

External Delegations

  1. Foreign-currency bank accounts may be opened under the terms of a Direction for Foreign-currency Departmental Bank Accounts or a Notice of Delegation Regarding Crown Bank Accounts (section 21 PFA 1989) issued by the Treasury.

  2. The department will comply with any terms and conditions set by the Treasury or the Minister of Finance for the operation of these bank accounts.

Internal Authorities

  1. Subject to any terms and conditions set by the Treasury, the department’s procedures for domestic bank accounts shall also apply to foreign-currency bank accounts. Two signatories are required to authorise a payment from a bank account.

  2. The department may not overdraw any of its bank accounts nor may the department invest surplus funds (including an interest-bearing account) except in accordance with a specific delegation given by the Treasury. Any interest received constitutes Crown money and must be remitted to the Crown by year end.

  3. The department will limit the funding of its foreign-currency bank accounts to the level necessary to settle transactions in the normal course of business.

Monitoring of Relationships

  1. The department will monitor the operation of its bank accounts and banking relationships in general to ensure their satisfactory operation.

Reporting

Guideline 12

The policy document must identify the types and frequency of foreign-exchange exposure reports to be produced for internal and external use, and to whom they are to be distributed.

Procedure for Amending Policy Document

  1. The department may apply for approval to amend its policy document at any time. In general, approval by joint Chief Executives will be required to make amendments to the policy document. However, if the proposed amendment is outside the parameters set out in the guidelines, approval from the Minister of Finance and the Responsible Minister will be required.
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