Note 18 – Financial Instruments | Financial Statements | Reserve Bank of Australia Annual Report – 1999

Reserve Bank of Australia Annual Report – 1999 Financial Statements Note 18 – Financial Instruments

Australian Accounting Standard AAS 33 – Presentation & Disclosure of Financial Instruments – requires disclosure of information relating to: both recognised and unrecognised financial instruments; their significance and performance; accounting policy terms & conditions; net fair values; and risk information.

A financial instrument is defined as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. The identifiable financial instruments for the Bank are its domestic government securities, its foreign government securities, bank deposits, interest rate futures, foreign currency swap contracts, gold loans, notes on issue and deposit liabilities.

Net fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction, and is usually determined by the quoted market price net of transaction costs. All of the Bank's recognised financial instruments are carried at current market value which approximates net fair value.

Financial risk of financial instruments embodies price risk (currency risk and interest rate risk); credit risk; liquidity risk; and cash flow risk. AAS 33 requires disclosure on interest rate risk and credit risk.

The interest rate risk and credit risk tables are based on the Bank's settled portfolio as reported in the Bank's balance sheet.

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The following table shows the Bank's balance sheet restated in compliance with AAS 33.

Interest rate risk
As at 30 June 1999

Assets
	Balance sheet total $M	Floating interest rate $M	Repricing period $M				Not bearing interest $M	Weighted average rate %
	Balance sheet total $M	Floating interest rate $M	0 to 3 months	3 to 12 months	1 to 5 years	Over 5 years	Not bearing interest $M	Weighted average rate %
Gold
Gold loans	1,008	–	380	539	89	–	–	1.8
Gold holdings	5	–	–	–	–	–	5	n/a
Sub-total	1,013
Foreign exchange
Securities sold under repurchase agreements	3,396	–	–	189	1,776	1,431	–	4.0
Securities purchased under repurchase agreements	7,384	–	7,384	–	–	–	–	4.4
Deposits and other securities	14,450	137	7,816	1,782	2,011	2,170	534	2.6
Accrued interest foreign exchange	140	–	–	–	–	–	140	n/a
Sub-total	25,370
Domestic government securities
Securities sold under repurchase agreements	662	–	–	81	459	122	–	5.1
Securities purchased under repurchase agreements	11,656	–	10,155	1,501	–	–	–	4.7
Other securities	9,091	–	3,424	1,818	2,296	1,553	–	5.0
Accrued interest domestic government securities	224	–	–	–	–	–	224	n/a
Sub-total	21,633
Loans, advances and bills discounted	76	57	–	–	–	–	19	3.3
Property, plant & equipment	265	–	–	–	–	–	265	n/a
Cash and liquid assets	587	–	–	–	–	–	587	n/a
Other assets	129	–	–	–	–	–	129	n/a
Total assets	49,073	194	29,159	5,910	6,631	5,276	1,903	3.8
Liabilities
Australian notes on issue	23,552	–	–	–	–	–	23,552	n/a
Deposits	10,383	10,193	–	–	–	–	190	2.2
Profit distribution	3,676	–	–	–	–	–	3,676	n/a
Other	4,225	–	4,104	–	–	–	121	4.0
Total liabilities	41,836	10,193	4,104	–	–	–	27,539	0.9
Capital and reserves	7,237	–	–	–	–	–	–	n/a
Total balance sheet	49,073
Off balance sheet items
Interest rate futures^*	(26)	–	(7)	–	(1)	(18)	–	n/a
Total assets	47,310	78	28,120	6,644	5,874	5,105	1,489	4.6
Total liabilities	37,481	11,073	1,887	–	–	–	24,521	1.0
Capital and reserves	9,829	–	–	–	–	–	–	n/a
Total balance sheet	47,310
Off balance sheet items	(1,864)	–	(877)	–	–	(987)	–	n/a

Other liabilities includes amounts outstanding under sale repurchase agreements.

All recognised financial instruments are shown at net fair value.

Off balance sheet items are shown at nominal market value (difference from net fair value is negligible).

All Financial Instruments are shown at their repricing period.

Repricing period is equivalent to maturity period except for some holdings of domestic government securities (which appear in the 0 to 3 months category):

Approximately $1.8 billion has a maturity period of 1–5 years

^* Interest rate futures reflect short positions in interest rate contracts traded in foreign futures exchanges to manage interest rate risk on Official Reserve Assets.

Credit risk

Credit risk in relation to a financial instrument is the risk that a third party (customer, bank or other counterparty) will not meet its obligations (or be permitted to meet them) in accordance with agreed terms.

The Bank's maximum exposure to credit risk in relation to each class of recognised financial assets, other than derivatives (off balance sheet items) is the carrying amount of those assets as indicated in the balance sheet. The Bank's exposures are all to highly rated counterparties and its credit risk is very low.

As part of an IMF support package during 1997/98 and 1998/99 the Bank undertook a series of foreign currency swaps with the Bank of Thailand. The Bank provided United States dollars, receiving Thai Baht in exchange. The amount outstanding on the swaps at 30 June 1999 was the equivalent of $1.3 billion Australian dollars ($1.2 billion at 30 June 1998), on which the Bank is earning a yield of 4.82% (5.33% in 1998). The swaps represent 2.6% of the Bank's total Assets as at 30 June 1999 (2.5% at 30 June 1998).

The Bank's maximum credit risk exposure in relation to off-balance sheet items is:

Foreign exchange swaps – As at 30 June 1999 the Bank was under contract to purchase $10.7 billion of foreign currency and sell $22.9 billion of foreign currency. As of that date there was an unrealised net gain of $119.5 million on these swap positions. The credit risk exposure of these contracts is the cost of re-establishing the contract in the market in the event of the failure of the counterparty to fulfil their obligations.
Interest rate futures – As at 30 June 1999 about 0.14% of the Bank's foreign currency reserves (excluding gold) were hedged through interest rate futures contracts. The amount of credit risk on these contracts is approximately $0.1 million ($9.3 million at 30 June 1998). As at 30 June 1999 there was an unrealised gain on those contracts of $0.2 million ($1.4 million at 30 June 1998).

Concentration of credit risk

The Bank operates to minimise its credit risk exposure through comprehensive risk management policy guidelines. The following table indicates the concentration of credit risk in the Bank's investment portfolio. See Note 1(c) Foreign Exchange.

Credit Risk
Security type	Risk rating of security issuer^*	Risk rating of counterparties^*	% of total asset portfolio as at 30/6/99	% of total asset portfolio as at 30/6/98
Domestic government securities
Holdings of Commonwealth Government securities	AAA	n/a	18.9	24.2
Securities sold under repurchase agreements	AAA	AAA	0.0	0.2
	AAA	AA	1.4	0.5
	AAA	other	0.0	0.3
Securities held under repurchase agreements	AAA	AAA	0.0	3.6
	AAA	AA	19.0	10.0
	AAA	other	1.5	2.7
	AA	AAA	0.0	0.1
	AA	AA	3.3	2.1
	AA	other	0.1	0.7
	other	other	0.0	0.2
Foreign investments
Holdings of securities	AAA	n/a	21.4	18.1
Securities sold under repurchase agreements	AAA	AA	4.6	2.6
	AAA	other	2.3	0.5
Securities held under repurchase agreements	AAA	AA	11.2	13.4
	AAA	other	3.8	9.5
Deposits	n/a	AAA	1.4	0.6
	n/a	AA	4.0	4.2
	n/a	other	2.9	2.5
Gold loans	n/a	AAA	0.2	0.3
	n/a	AA	1.3	0.7
	n/a	other	0.6	1.4
Other			2.1	1.6
			100%	100%
* Standard & Poor's equivalent ratings