Approved 

by Regulation No. 41/4 of the National Bank of the Kyrgyz Republic Board  

as of October 14, 2009  

Instruction 

“On the Order of Compliance with open currency position limits by the 

Banks Operating under the Principles of Islamic Banking and Finance” 

(Amendments and additions are approved by Resolutions of the National Bank of the Kyrgyz Republic Board No.91/7 as of December 16, 2010, No.21/11 as of May 31, 2017) 

I. General Provisions 

1.1. (Became invalid as per Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).    

1.2. The purpose of this Instruction is to determine the procedure for calculating a open currency position and to monitor compliance with open currency position limits by Islamic banks and the banks having an “Islamic window” (hereinafter referred to as the “banks”) licensed by the National Bank of the Kyrgyz Republic (hereinafter referred to as the National Bank) for carrying out foreign currency transactions. 

1.3. When developing internal policies and procedures for controlling foreign exchange risks, the bank shall be guided by the requirements of this Instruction, the Sharia’h standards and accounting and reporting standards approved by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). 

1.4. The following definitions shall apply for the purposes of this Instruction: 

Currency risk is the risk that the bank will receive losses due to a change in the value of the bank’s claims (assets)/liabilities denominated in a foreign currency, with an unfavorable exchange rate change at a time when the bank has a open open currency position for that currency. The foreign exchange position arises when performing currency transactions and is an indicator of the degree of the bank’s exposure to a foreign exchange risk. 

Foreign exchange transactions are the transactions related to the exchange, purchase/sale (conversion) of a foreign currency, as well as other transactions, as a result of which the volume of claims (assets) or liabilities expressed in a foreign currency shall change. 

Net currency position is the difference between the claims (assets) and liabilities of the bank, both on balance sheet and off-balance sheet in a separate foreign currency. 

If the claims (assets) and liabilities of the bank do not coincide in the respective currencies, the foreign exchange position is considered to be open, and in case of equality - closed. 

An open currency position of the bank can be long (if the bank’s claims (assets) in the relevant currency exceed its liabilities in the same currency) or short (if the liabilities exceed the claims (assets)). A long currency position is recorded with a “+” sign, a short one with a “-” sign. 

The total foreign exchange position is the sum of all net currency positions of the bank in all foreign currencies that is calculated using the “short hand” method defined in paragraph 2.5 hereof. 

The limits of opencurrencypositions are the restrictions established by the National Bank, expressed as a percentage of net foreign exchange positions (for each and total foreign currency) to the net total capital of the bank. Net foreign exchange positions shall be calculated in KGS at the National Bank’s discount rate. The limits of net foreign exchange positions shall be calculated in percent with rounding up to two decimal places after the decimal point. 

The net total capital of the bank shall be calculated in accordance with the requirements of the regulatory legal acts of the National Bank. 

For the purposes of this Instruction, the value of the net total capital of the bank is used as of the 1st day of each month when calculating the limits of net foreign exchange positions. 

The date of entering into transaction is the date the parties reached an agreement on the main terms of the transaction (types of currencies, exchange rate, amounts of funds, value date, etc.). 

The value date is the date on which the funds are credited to the accounts of the participants in the transaction. 

II. Procedure for Settlement of Net Foreign Exchange Positions 

2.1. At the end of each business day, the bank shall calculate the following indicators: 

- net currency positions for each foreign currency; 

- the total currency position. 

2.2. Net currency positions are calculated in accordance with the procedure given in the Instruction “On the Order of Compliance with Net Foreign Exchange Position Limits by commercial banks in the territory of the Kyrgyz Republic” (approved by Resolution No.36/13 of the National Bank Board as of December 29, 2004, registered in MJ KR under No. 16-05 as of February 1, 2005) separately for each foreign currency with mandatory inclusion in the calculation: 

- net spot position in a foreign currency on transactions carried out by the bank in accordance with the principles of Islamic banking and finance. This amount is calculated as the difference between the balance sheet assets and the balance sheet liabilities, including uncompleted “spot” contracts with a value date of up to 2 days. The calculation is based on the net balance sheet value of assets and liabilities; 

- irrevocable guarantees, letters of credit and similar financial instruments that have been issued or confirmed by the bank, denominated in a foreign currency, except for guarantees, letters of credit and similar financial instruments secured in the same currency. For the purposes of this Instruction, financial instruments refer to promissory notes (surety in a bill), traveler’s checks and other liabilities of the bank accepted in international practice. Financial instruments do not include credit lines. 

At the same time, these guarantees, letters of credit and similar financial instruments are included in the calculation of the net foreign exchange currency position from the moment the beneficiary submits a demand for payment of the amount of money under the liability or receipt of documented information by the bank indicating a high probability of presenting a claim for payment under these liabilities. For example, the beneficiary’s letter on the default (delay in execution) of the liabilities by the principal is the basis for including the guarantee in the calculation of the net currency position; 

- other balance sheet and off-balance sheet assets/liabilities in a foreign currency that have been placed/attracted in accordance with the principles of Islamic banking and finance and bearing currency risk. 

2.3. Currency transactions are included in the calculation of the currency position on the date of transaction (including transactions containing a future value date that is not the date of transaction), except for transactions that are based on the mudaraba and sharika/musharaka agreements. 

The foreign currency transactions that are based on the mudaraba and sharika/musharaka agreements are included in the calculation of the currency position on the date of receipt/provision by the bank of the amount in a foreign currency. The profit or loss received as a result of these transactions is included in the calculation of the currency position at the time of their actual occurrence. 

2.4. When calculating net foreign exchange positions for each foreign currency, the values of currency positions are converted to the som equivalent at the discount rate of the National Bank effective at the reporting date. 

2.5. The total currency position for all foreign currencies is calculated using the “short hand” method, that is, the calculation is made by summing all long net currency positions separately and all short net currency positions separately for each currency. Then the obtained values ​​are compared with each other (in absolute value), and the largest of the two values ​​is used in calculating the limit of the total currency position. 

III. Net Foreign Exchange Position Limits 

3.1. The National Bank shall set the following limits for a net foreign exchange position in order to reduce a currency risk:  

3.1.1. As of the end of a business day, the long/short net foreign exchange currency position of the bank for each foreign currency shall not exceed: 

a) for the currencies of the states that are members of the EAEU and OECD and the states that have a long-term sovereign credit rating not lower than the “A” level, assigned by the “Standard & Poor’s” rating agency or an equivalent rating assigned by one of the rating agencies “Japan Credit Rating Agency (JCR )”, “Fitch Ratings”, “Dominion Bond Rating Service (DBRS)” and “Moody’s Investors Service, as well as for the currencies of the countries that signed Article 8 of the “Articles of Agreement” with the IMF - 15% of the net total capital of the bank; 

Note: OECD - Organization for Economic Cooperation and Development. A list of OECD member states is available on the official website www.oecd.org;  

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

b) for the currencies of all the rest countries, - 0% of the net total capital of the bank (closed position). 

3.1.2. As of the end of a business day, the amount of the total currency position for all foreign currencies of the countries indicated in subparagraph a) of paragraph 3.1.1 of this Instruction shall not exceed 20% of the net total capital of the bank. 

3.2. Compliance with the established limits of open currency positions is mandatory at the end of each business day. 

3.3. Exceedings the established limits of net foreign exchange positions cannot be deferred for the next business day by the bank. The limits should be brought into line with the requirements of the National Bank until the end of the current business day.  

3.4. The value of net foreign exchange positions during the business day is controlled by the bank independently, based on its own assessment of the acceptable level of a currency risk. At the same time, the bank shall keep the sizes of a currency risk during the day in accordance with the internal currency risk management policy approved by the Board of Directors. 

3.5. The limit value of the net foreign exchange positions’ limits can be reduced by the decision of the Supervisory Committee when the bank implements unreliable and unhealthy practice of conducting transactions or in violation of banking legislation. 

3.6. If the value of the net total capital of the bank is negative or equal to zero, the bank shall bring net currency positions for each currency to zero value (closed position) within the terms established by the National Bank. 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

IV. Reporting of the Bank and Order of Its Presentation 

4.1. The bank shall submit the reports on net foreign exchange positions as of the end of the last business day to the National Bank daily until 09.00 according to appendices 1 и 2 hereof. 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

4.2. The bank shall present the following reports on net foreign exchange positions with account of the data of all branch offices, bank subsidiaries and exchange offices: 

- report on foreign exchange transactions carried out in accordance with the principles of Islamic finance (appendix 1); 

- consolidated report on all transactions of the bank (appendix 2). 

4.3. The Islamic bank shall present a report on net foreign exchange positions according to appendix 1. 

4.4. The bank with “Islamic window” shall present a report on net foreign exchange positions by the bank in a whole according to appendix 2 hereof. 

V. Sanctions for Violation of Fixed Limits of a Net Foreign Exchange Position by the Bank 

5.1. If the bank violates the fixed limits of a net foreign exchange position, the National Bank shall apply sanctions in the form of a fine in the amount of 5% of the amount of the violation, but not more than 1% of the paid authorized capital of the bank, in accordance with the regulations of the National Bank. 

5.2. At systematic (more than twice in successive 30 calendar days) violation of the fixed limits by the bank, the National Bank may apply other sanctions provided for by the banking legislation and regulations of the National Bank up to the license revocation. 

Note: Exceeding the fixed limits within 0-0.05% does not entail the imposition of penalties.  

5.3. Any attempts of the bank to avoid reflection of the real currency position in reporting will be considered by the National Bank as: 

- attempts to mislead the National Bank; 

- unhealthy banking practices; 

- manipulation of the currency position with the purpose of distortion of its real value, that is, conducting doubtful transactions, the origin and performance of which cannot be clearly identified and/or if these transactions affect the financial statements of the bank and its economic standards. 

5.4. In case of violation of any of the requirements of this Instruction, the bank’s management shall be obliged to inform the National Bank of the violations committed immediately and to submit a written explanation of the reasons for the violation committed with a list of measures taken by the bank to eliminate it in a two-day period. 

5.5. As a rule, sanctions in the form of a fine shall not be applied to a bank if the limit of a net foreign exchange position was violated due to force majeure circumstances. 

Force majeure includes: natural disasters (floods, earthquakes, fires and other natural or man-made disasters), military conflicts, terrorist acts, civil disorders and unrest, as well as the issuance of regulatory legal acts limiting or prohibiting the implementation of any actions and which affected the bank’s compliance with the economic standards set by the National Bank. 

5.6. The Supervisory Committee has the right to consider the expediency of collecting a fine from the bank for non-observance of the fixed limits of the net foreign exchange position taking into account all circumstances that led to the violation of this economic standard during the activities of the provisional administration in the bank. 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

5.7. In case violation of the net foreign exchange position limit during the activities of the provisional administration in the bank was the result of the bank’s activity prior to the introduction of the provisional administration, the Supervisory Committee is entitled to consider the issue of collecting a fine from the bank with a deferral of its payment. 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

VI. Organization of Internal Control by Foreign Currency Transactions  

6.1. The bank shall develop an internal currency risk management policy and organize adequate internal control to conduct foreign currency transactions. 

6.2., The appropriate procedures should be developed for each of the conducted foreign currency transactions, which shall reflect at least the following issues:  

- demarcation of functions of back and front offices; 

- split of the functional duties of the bank’s employees in such a way that one employee cannot execute and/or monitor any process in full from initiation of a transaction to its accounting in the books; 

- introduction of a clear system for authorizing the volume of transactions conducted by the bank by the relevant authorized employees of the bank; 

- establishment of internal limits of a net foreign exchange position for each foreign currency and in general for all currencies by the bank; 

- establishment of the level of sufficiency of information on the reliability of counterparties, depending on the nature and degree of risk of transactions and the category of counter-agent; 

- establishment of requirements for internal audit in the conduct of inspections of currency transactions (at least, the independence of auditors and the availability of the necessary skills and knowledge); 

- establishment of requirements for accounting and reporting on currency transactions for the bank and its branches (form, frequency of presentation, responsibility). 

Appendix 1  

DAILY REPORT on net foreign exchange positions (NFEP) by transactions conducted in accordance with the principles of Islamic financing as of ___. ___.20__   

Net total capital (NTC) as of “01” __________ : _______________ KGS thou.  

Full name: ____________________ Position: ______________________ Date: ____________________ 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017). 

Appendix 2  

CONSLIDATED DAILY REPORT on net foreign exchange positions (NFEP) as of ___. ___________.20__  

NTC as of “01” __________ : _______________ KGS thou. 

Full name: ____________________  Position: ______________________ Date: ____________________ 

(As revised by Resolution No.21/11 of the National Bank of the Kyrgyz Republic Board as of May 31, 2017).