Reserve Bank of Australia Annual Report – 2005 Financial Statements Note 18
Note 18 FINANCIAL INSTRUMENTS
Australian Accounting Standard AASB1033 – Presentation and Disclosure of Financial Instruments requires disclosure of information relating to: both recognised and unrecognised financial instruments; their significance and performance; accounting policy terms and 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 Australian dollar securities, its foreign government securities, bank deposits, interest rate futures, foreign currency swap contracts, gold loans, cash and liquid assets, notes on issue and deposit liabilities.
Net fair valueis 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. The RBA's recognised financial instruments are carried at current market value which approximates net fair value.
Financial riskof financial instruments embodies price risk (currency risk and interest rate risk); credit risk; liquidity risk and cash flow risk. AASB1033 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 Statement of Financial Position.
Interest rate risk
Interest rate riskis 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 Statement of Financial Position restated in compliance with AASB1033.
| 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 loans | 1,217 | – | 147 | 92 | 952 | – | 26 | 1.3 | |
| Gold holdings | 277 | – | – | – | – | – | 277 | n/a | |
| Sub-total | 1,494 | ||||||||
| Foreign exchange | |||||||||
| Securities sold under repurchase agreements |
7,629 | – | – | 363 | 3,971 | 3,295 | – | 3.4 | |
| Securities purchased under repurchase agreements |
29,301 | – | 29,301 | – | – | – | – | 3.0 | |
| Deposits and other securities |
23,810 | 613 | 11,935 | 2,670 | 5,366 | 2,337 | 889 | 2.7 | |
| Accrued interest – foreign exchange |
188 | – | – | – | – | – | 188 | n/a | |
| Sub-total | 60,928 | ||||||||
| Australian dollar securities | |||||||||
| Securities sold under repurchase agreements |
573 | – | – | 30 | 170 | 373 | – | 5.1 | |
| Securities purchased under repurchase agreements |
16,569 | – | 16,569 | – | – | – | – | 5.5 | |
| Other securities | 3,688 | – | 1,060 | 53 | 1,561 | 1,014 | – | 5.2 | |
| Accrued interest – Australian dollar securities |
70 | – | – | – | – | – | 70 | n/a | |
| Sub-total | 20,900 | ||||||||
| Property, plant & equipment |
313 | – | – | – | – | – | 313 | n/a | |
| Cash and liquid assets | 1,008 | 992 | – | – | – | – | 16 | 5.5 | |
| Loans and advances | 21 | 21 | – | – | – | – | – | 3.7 | |
| Other | 295 | – | – | – | – | – | 295 | n/a | |
| Total assets | 84,959 | 1,626 | 59,012 | 3,208 | 12,020 | 7,019 | 2,074 | 3.6 | |
| Liabilities | |||||||||
| Australian notes on issue | 35,624 | 2,376 | – | – | – | – | 33,248 | 0.3 | |
| Deposits | 29,228 | 2,808 | 24,100 | 1,350 | – | – | 970 | 5.3 | |
| Distribution payable to Australian Government |
1,683 | – | – | – | – | – | 1,683 | n/a | |
| Other | 8,866 | – | 8,545 | 4 | – | – | 317 | 2.5 | |
| Total liabilities | 75,401 | 5,184 | 32,645 | 1,354 | – | – | 36,218 | 2.5 | |
| Capital and reserves | 9,558 | ||||||||
| Total balance sheet | 84,959 | ||||||||
| Off balance sheet items | |||||||||
| Interest rate futures | 65 | – | – | – | – | 65 | – | n/a | |
| Total assets | 73,073 | 1,295 | 45,989 | 4,670 | 11,984 | 7,216 | 1,919 | 2.9 | |
| Total liabilities | 62,217 | 5,211 | 22,996 | 11 | – | – | 33,999 | 2.0 | |
| Capital and reserves | 10,856 | ||||||||
| Total balance sheet | 73,073 | ||||||||
| Off balance sheet items | 1,386 | – | – | – | – | 1,386 | – | n/a | |
Other liabilities include amounts outstanding under sell 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.
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 to highly-rated counterparties and its credit risk is very low.
The RBA's maximum credit risk exposure in relation to off-balance sheet items is:
- Foreign exchange swaps– As at 30 June 2005 the RBA was under contract to purchase $6.3 billion of foreign currency and sell $36.0 billion of foreign currency. As of that date there was an unrealised net loss of $1.0 million on these swap positions included in net profit. 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 its obligations.
- Interest rate futures – As at 30 June 2005 the amount of credit risk on interest rate futures contracts was approximately $0.3 million ($1.4 million at 30 June 2004). As at 30 June 2005 there was an unrealised gain brought to account on those contracts of $0.1 million ($0.3 million unrealised gain at 30 June 2004).
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)).
| Risk rating of security issuer* |
Risk rating of counterparties* |
% of total assets as at 2005 |
% of total assets as at 2004 |
|
|---|---|---|---|---|
| Domestic Government Securities | ||||
| Holdings – Commonwealth Government securities | AAA | n/a | 2.9 | 2.8 |
| Holdings – Semi Government securities | AAA | n/a | 1.1 | 0.9 |
| AA | n/a | 0.3 | 0.4 | |
| Securities sold under repurchase agreements | AAA | AAA | 0.0 | 1.6 |
| AAA | AA | 0.5 | 0.7 | |
| AAA | other | 0.2 | 0.0 | |
| Securities held under repurchase agreements | AAA | AA | 17.4 | 11.7 |
| AAA | other | 1.7 | 0.6 | |
| AA | AA | 0.2 | 4.6 | |
| AA | other | 0.2 | 1.0 | |
| other | other | 0.0 | 0.7 | |
| Foreign investments | ||||
| Holdings of securities | AAA | n/a | 12.0 | 20.4 |
| AA | n/a | 3.0 | 3.7 | |
| A | n/a | 0.4 | 0.1 | |
| Securities sold under repurchase agreements | AAA | AA | 8.5 | 6.2 |
| AAA | other | 0.6 | 1.6 | |
| Securities held under repurchase agreements | AAA | AA | 32.0 | 20.2 |
| AAA | other | 2.5 | 6.2 | |
| Deposits | n/a | AAA | 1.1 | 0.3 |
| n/a | AA | 10.1 | 12.6 | |
| n/a | other | 1.2 | 0.0 | |
| Other | n/a | AAA/other | 0.3 | 0.1 |
| Gold loans | n/a | AAA | 0.1 | 0.1 |
| n/a | AA | 0.7 | 1.1 | |
| n/a | other | 0.6 | 0.8 | |
| Other | 2.4 | 1.6 | ||
| 100 | 100 | |||
| * Standard & Poor's equivalent ratings | ||||