Reserve Bank of Australia Annual Report – 2000 Financial Statements Note 17 – Financial Instruments

Australian Accounting Standard AAS33 – 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 RBA 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 RBA'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. AAS33 requires disclosure on interest rate risk and credit risk.

The interest rate risk and credit risk tables are based on the RBA's settled portfolio as reported in the RBA'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 RBA's balance sheet restated in compliance with AAS33.

Interest rate risk
As at 30 June 2000

Balance sheet total $M Floating interest rate $M Repricing period $M Not bearing interest $M Weighted average rate %
0 to 3 months 3 to 12 months 1 to 5 years over 5 years
Assets
Gold
Gold loans 1,227 – 425 756 46 – – 1.5
Gold holdings 6 – – – – – 6 n/a
Sub-total 1,233  
Foreign exchange
Securities sold under repurchase agreements 4,066 – 83 64 2,279 1,640 – 5.6
Securities purchased under repurchase agreements 5,964 – 5,964 – – – – 6.5
Deposits and other securities 20,020 149 13,473 1,247 2,506 2,275 370 4.1
Accrued interest foreign exchange 178 – – – – – 178 n/a
Sub-total 30,228  
Domestic government securities
Securities sold under repurchase agreements 21 – 21 – – – – 4.5
Securities purchased under repurchase agreements 15,997 – 15,997 – – – – 5.9
Other securities 6,768 – 1,102 1,874 1,419 2,373 – 6.0
Accrued interest domestic government securities 149 – – – – – 149 n/a
Sub-total 22,935  
Loans, advances and bills discounted 60 42 – – – – 18 3.7
Property, plant & equipment 292 – – – – – 292 n/a
Cash and liquid assets 821 701 – – – – 120 5.7
Other assets 125 – – – – – 125 n/a
Total assets 55,694 892 37,065 3,941 6,250 6,288 1,258 5.1
Liabilities
Australian notes on issue 25,434 – – – – – 25,434 n/a
Deposits 15,486 15,486 – – – – – 5.9
Profit distribution 1,479 – – – – – 1,479 n/a
Other 4,329 – 4,307 – – – 22 5.3
Total liabilities 46,728 15,486 4,307 – – – 26,935 2.4
Capital and reserves 8,966  
Total balance sheet 55,694  
Off balance sheet items
Interest rate futures (149) – (379) – 147 83 – n/a
Total assets 49,073 194 29,159 5,910 6,631 5,276 1,903 3.8
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 (26) – (7) – (1) (18) – 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 which is equivalent to the remaining term to maturity. (In 1999 approximately $1.8 billion holdings of domestic government securities which appear in the 0 to 3 months category, had a maturity period of 1–5 years.)

Interest rate futures reflect the 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 customer, bank or other counterparty will not meet its obligations (or be permitted to meet them) in accordance with agreed terms.

The RBA'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 RBA'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, 1998/99 and 1999/2000 the RBA undertook a series of foreign currency swaps with the Bank of Thailand. The RBA provided United States dollars, receiving Thai baht in exchange. The amount outstanding on the swaps at 30 June 2000 was the equivalent of $1.4 billion Australian dollars ($1.3 billion at 30 June 1999), on which the RBA is earning a yield of 6.15% (4.82% in 1999). The swaps represent 2.6% of the RBA's total assets as at 30 June 2000 (2.6% at 30 June 1999).

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

  1. Foreign exchange swaps – As at 30 June 2000 the RBA was under contract to purchase $10.1 billion of foreign currency and sell $27.5 billion of foreign currency. As of that date there was an unrealised net gain of $279.0 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.
  2. Interest rate futures – As at 30 June 2000 about 0.49% of the RBA's foreign currency reserves (excluding gold) were hedged through interest rate futures contracts. The amount of credit risk on these contracts is approximately $2.5 million ($0.1 million at 30 June 1999). As at 30 June 2000 there was an unrealised loss on those contracts of $0.2 million ($0.2 million at 30 June 1999).

Concentration of credit risk

The RBA operates to minimise its credit risk exposure through comprehensive risk management policy guidelines. The following table indicates the concentration of credit risk in the RBA'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 30/6/00 % of total asset portfolio as at 30/6/99
Domestic government securities
Holdings of Commonwealth Government securities AAA n/a 12.4 18.9
Securities sold under repurchase agreements AAA AA 0.0 1.4
Securities held under repurchase agreements AAA AA 24.4 19.0
AAA other 1.5 1.5
AA AA 2.7 3.3
AA other 0.2 0.1
Foreign investments
Holdings of securities AAA n/a 11.3 21.4
AA n/a 11.9 0.0
Securities sold under repurchase agreements AAA AA 5.4 4.6
AAA other 1.9 2.3
Securities held under repurchase agreements AAA AA 6.8 11.2
AAA other 3.9 3.8
Deposits n/a AAA 7.3 1.4
n/a AA 3.1 4.0
n/a other 2.7 2.9
Gold loans n/a AAA 0.3 0.2
n/a AA 1.4 1.3
n/a other 0.5 0.6
Other     2.3 2.1
    100% 100%
*Standard & Poor's equivalent ratings