Reserve Bank of Australia Annual Report – 2006 Financial Statements Note 16
Note 16 FINANCIAL INSTRUMENTS
Australian Accounting Standard AASB 132 – Financial Instruments: Disclosure and Presentation requires disclosure of information relating to financial instruments; their significance and performance; accounting policies; terms and conditions; fair values and risk information. The Risk Management chapter in this report provides additional information on the RBA's management of financial risks.
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 Australian dollar securities, foreign government securities, interest rate futures, foreign currency swap contracts and its shareholding in the Bank for International Settlements are carried in the balance sheet (and shown in this note) at fair value. The RBA's bank deposits, cash and cash equivalents, notes on issue and deposit liabilities are carried in the balance sheet (and shown in this note) at face value, which is equivalent to their amortised cost using the effective interest method; this approximates fair value.
Financial riskof financial instruments embodies market risk (currency risk and interest rate risk); credit risk; liquidity risk and cash flow risk.
The interest rate risk and credit risk tables are based on the RBA's contracted portfolio as reported in the RBA's balance sheet.
Foreign exchange risk
Foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in exchange rates. The RBA's net foreign currency exposure as at 30 June 2006 was $28.1 billion ($23.8 billion as at 30 June 2005).
Interest rate risk
Interest rate risk is the risk that the fair 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 AASB 132.
| Balance sheet total $M |
Floating interest rate $M |
Repricing Period $M | Not bearing interest $M |
Weighted average coupon rate % |
Weighted average effective rate % |
|||||
|---|---|---|---|---|---|---|---|---|---|---|
| 0 to 3 months | 3 to 12 months | 1 to 5 years |
Over 5 years | |||||||
| Assets | ||||||||||
| Gold loans | 1,434 | – | 105 | 238 | 1,055 | – | 36 | 1.38 | 1.38 | |
| Gold holdings | 717 | – | – | – | – | – | 717 | n/a | n/a | |
| Sub-total | 2,151 | |||||||||
| Foreign exchange | ||||||||||
| Balances with central banks | 676 | 673 | – | – | – | – | 3 | 4.49 | 4.49 | |
| Securities sold under repurchase agreements |
9,650 | – | – | 1,432 | 3,780 | 4,438 | – | 3.69 | 4.91 | |
| Securities purchased under repurchase agreements |
29,121 | – | 29,121 | – | – | – | – | 4.63 | 4.63 | |
| Other securities | 19,581 | 267 | 10,648 | 1,562 | 3,762 | 2,957 | 385 | 2.16 | 2.24 | |
| Deposits | 12,310 | 28 | 12,279 | – | – | – | 3 | 4.40 | 4.40 | |
| Accrued interest - foreign exchange |
351 | – | – | – | – | – | 351 | n/a | n/a | |
| Sub-total | 71,689 | |||||||||
| Australian dollar securities | ||||||||||
| Securities sold under repurchase agreements |
172 | – | – | 112 | 60 | – | – | 7.26 | 5.86 | |
| Securities purchased under repurchase agreements |
26,195 | – | 26,195 | – | – | – | – | 5.77 | 5.77 | |
| Other securities | 3,824 | – | – | 243 | 2,195 | 1,386 | – | 6.66 | 5.82 | |
| Accrued interest – Australian dollar securities |
115 | – | – | – | – | – | 115 | n/a | n/a | |
| Sub-total | 30,306 | |||||||||
| Property, plant & equipment | 329 | – | – | – | – | – | 329 | n/a | n/a | |
| Cash and cash equivalents | 575 | 560 | – | – | – | – | 15 | 5.75 | 5.75 | |
| Loans and advances | 20 | 20 | – | – | – | – | – | 3.79 | 3.79 | |
| Other | 377 | – | – | – | – | – | 377 | n/a | n/a | |
| Total assets | 105,447 | 1,548 | 78,348 | 3,587 | 10,852 | 8,781 | 2,331 | 3.87 | 3.95 | |
| Liabilities | ||||||||||
| Australian notes on issue | 38,065 | 2,543 | – | – | – | – | 35,522 | 0.38 | 0.38 | |
| Deposits | 43,204 | 3,177 | 35,935 | 2,400 | – | – | 1,692 | 5.78 | 5.78 | |
| Distribution payable to Australian Government |
1,477 | – | – | – | – | – | 1,477 | n/a | n/a | |
| Other | 11,493 | – | 10,467 | – | – | – | 1,026 | 4.26 | 4.26 | |
| Total liabilities | 94,239 | 5,720 | 46,402 | 2,400 | – | – | 39,717 | 3.33 | 3.33 | |
| Capital and reserves | 11,208 | |||||||||
| Total balance sheet | 105,447 | |||||||||
| Off balance sheet items | ||||||||||
| Interest rate futures | 2,594 | – | – | – | – | – | 2,594 | n/a | n/a | |
| Balance sheet total $M |
Floating interest rate $M |
Repricing Period $M | Not bearing interest $M |
Weighted average coupon rate % |
Weighted average effective rate % |
|||||
|---|---|---|---|---|---|---|---|---|---|---|
| 0 to 3 months | 3 to 12 months | 1 to 5 years |
Over 5 years | |||||||
| Total assets | 85,271 | 1,626 | 59,010 | 3,207 | 12,097 | 7,204 | 2,127 | 3.83 | 3.60 | |
| Total liabilities | 75,668 | 5,184 | 32,912 | 1,354 | – | – | 36,218 | 4.82 | 4.41 | |
| Capital and reserves | 9,603 | |||||||||
| Total balance sheet | 85,271 | |||||||||
| Off balance sheet items | 65 | – | – | – | – | 65 | – | n/a | n/a | |
Other liabilities include amounts outstanding under sale repurchase agreements.
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.
Sensitivity to risks
The sensitivity of the fair value of the RBA's financial assets to fluctuations in the exchange rate and interest rates is shown below.
| Change in fair value $M | |
|---|---|
| Impact on: Net foreign exchange holdings of: |
|
| A rise of 10 per cent in the value of the A$ | 2,456 |
| An increase of 1 percentage point in yield curves overseas | 769 |
| Australian dollar securities of: | |
| An increase of 1 percentage point in the yield curve in Australia | 159 |
Concentration of foreign exchange
The Bank's net holdings of foreign exchange were distributed as follows as at 30 June:
| % of foreign exchange as at 2006 |
% of foreign exchange as at 2005 |
|
|---|---|---|
| US dollar | 45 | 45 |
| Euro | 45 | 45 |
| Japanese yen | 10 | 10 |
| Total foreign exchange | 100 | 100 |
Fair value of financial instruments
AASB 130 requires that the fair value of financial assets and liabilities be disclosed according to their accounting classification under AASB 139.
| 2006 $M | 2005 $M | |
|---|---|---|
| Assets | ||
| At fair value through Profit or Loss | 33,493 | 25,355 |
| Loans and receivables | 69,956 | 57,969 |
| Available-for-sale | 842 | 1,249 |
| Total financial assets as at 30 June | 104,291 | 84,573 |
| Non-financial assets | 1,156 | 698 |
| Total assets as at 30 June | 105,447 | 85,271 |
| Liabilities | ||
| At fair value through Profit or Loss | 1,310 | 555 |
| Not at fair value through Profit or Loss | 91,323 | 73,302 |
| Non-financial liabilities | 1,606 | 1,811 |
| Total liabilities as at 30 June | 94,239 | 75,668 |
Credit risk
Credit riskin relation to a financial instrument is the risk that a customer, bank or other counterparty will not meet its obligations (or not 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 low.
The RBA's maximum credit risk exposure in relation to off-balance sheet items is:
- Foreign exchange swaps – As at 30 June 2006 the RBA was under contract to purchase $16.2 billion of foreign currency and sell $49.5 billion of foreign currency. As of that date there was an unrealised net loss of $261 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 2006 the amount of credit risk on interest rate futures contracts was approximately $3.4 million ($0.3 million at 30 June 2005). As at 30 June 2006 there was an unrealised loss brought to account on those contracts of $1.6 million ($0.1 million unrealised gain at 30 June 2005).
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(b).
| Risk rating of security issuer* |
Risk rating of counterparties* |
% of total assets as at 2006 |
% of total assets as at 2005 |
|
|---|---|---|---|---|
| Domestic Government Securities | ||||
| Holdings – Commonwealth Government securities |
AAA | n/a | 2.1 | 2.9 |
| Holdings – Semi Government securities | AAA | n/a | 1.5 | 1.1 |
| AA | n/a | 0.0 | 0.3 | |
| Securities sold under repurchase agreements |
AAA | AA | 0.1 | 0.5 |
| AAA | A | 0.1 | 0.2 | |
| Securities held under repurchase agreements |
AAA | AA | 9.0 | 10.4 |
| AAA | A | 0.7 | 1.6 | |
| AAA | other | 1.9 | 1.6 | |
| AA | AA | 11.5 | 3.6 | |
| AA | A | 0.2 | 1.6 | |
| AA | other | 0.0 | 0.0 | |
| A | AA | 1.4 | 0.3 | |
| A | A | 0.1 | 0.4 | |
| Foreign investments | ||||
| Holdings of securities | AAA | n/a | 10.2 | 12.0 |
| A | n/a | 8.8 | 3.4 | |
| Securities sold under repurchase agreements |
AAA | AA | 7.2 | 8.5 |
| AAA | A | 1.7 | 0.6 | |
| A | AA | 0.2 | 0.0 | |
| A | A | 0.1 | 0.0 | |
| Securities held under repurchase agreements |
AAA | AAA | 0.2 | 0.0 |
| AAA | AA | 25.1 | 32.0 | |
| AAA | A | 2.1 | 2.5 | |
| A | AAA | 0.0 | 0.0 | |
| A | AA | 0.1 | 0.0 | |
| A | A | 0.1 | 0.0 | |
| Deposits | n/a | AAA | 0.6 | 1.1 |
| n/a | AA | 11.1 | 10.7 | |
| n/a | A | 0.0 | 0.6 | |
| Other | n/a | AAA/other | 0.3 | 0.3 |
| Gold loans | n/a | AAA | 0.1 | 0.1 |
| n/a | AA | 0.7 | 0.7 | |
| n/a | A | 0.6 | 0.6 | |
| Other | 2.2 | 2.4 | ||
| 100 | 100 | |||
| * Standard & Poor's equivalent ratings | ||||