Guideline No. 7.6.1
Prudential Reporting of Euro
Further to my letter of 12 June 1998, I am writing to inform you of the adjustments that will be made to prudential returns reported by authorised institutions to the HKMA upon the official introduction of the Euro on 1 January 1999.
General Reporting Principles
After 1 January 1999, the bilateral conversion rates between the Euro and the national currencies of the Euro-participating countries will be irrevocably fixed. This shall in effect eliminate the bilateral foreign exchange risk between the Euro and the national currencies and among the national currencies themselves. As for the bond markets, the equalisation of interest rates of the EMU countries over time will also reduce significantly the differences in the interest rate risk of the national currencies. In view of above, for the purpose of prudential reporting, the HKMA will treat positions in the national currencies as positions in the Euro. That is, positions in the national currencies shall be aggregated (i.e. netted) and reported as positions in the Euro. For example, a long position in Deutschemark will be offset against a short position in the French franc in arriving at the net open position in the Euro. Similarly, a long position in Deutschemark bonds will be offset against a short position in Euro bonds in arriving at the total Euro interest rate risk exposures. This arrangement will simplify return completion and provide reporting continuity beyond the transitional period.
Specific Prudential Returns
The following returns will be affected by the introduction of the Euro :
- Return of Foreign Currency Position MA(BS)6
- Return of Interest Rate Risk Exposures MA(BS)12
- Return of Market Risk Exposures MA(BS)3A
Details of how the returns will be amended to cater for the reporting of exposures in the Euro and the national currencies of the Euro-participating countries are set out in Appendix 1. A summary of all the amendments to the relevant returns & their completion instructions is at Appendix 2 for ease of reference.
Status of the European Central Bank
The European Central Bank will be treated as a central bank of Tier 1 countries for prudential reporting purposes.
STET/STEM Templates
The HKMA is working on incorporating the above amendments into the templates of the STET and STEM systems for submission of prudential returns and will let institutions have the revised templates before the Euro is introduced on 1 January 1999.
Should you have any queries on the above arrangements, please feel free to contact Mr. Cho-hoi Hui (2878 1485) and Mr. Cedric Wong (2878 1626) of this office.
1. These countries are France, Germany, Italy, Spain, Belgium, the Netherlands, Luxembourg, Portugal, Austria, Finland and Ireland.
Appendix 1 : Prudential Returns - Reporting of Euro
The following sets out how the relevant prudential returns will be affected by the introduction of the Euro :
1. Return of Foreign Currency Position MA(BS)6
The existing return will be amended to include "Euro" as a new currency classification, replacing the "Deutschemarks" and the "French francs" classifications. The revised return, which will be effective from 1 January 1999, is attached at Annex 1.
In terms of the net overnight open position in any individual currency, the limit of not exceeding 10% of the capital base of an institution will similarly apply to the Euro. Authorised institutions that wish to seek exceptions to this limit should contact the HKMA to agree on the limits.
2. Return of Interest Rate Risk Exposures MA(BS)12
There will be no amendment made to the existing return. Interest rate exposures in the participating national currencies shall be aggregated and reported under the Euro on a separate page if the aggregate position meets the 5% significance rule.
3. Return of Market Risk Exposures MA(BS)3A
Foreign exchange exposures
As in the Return of Foreign Currency Position, a new currency classification "Euro" will replace the "Deutschemarks" and the "French francs" classifications in Part III of the Return of Market Risk Exposures (Annex 2). The same 8% will apply to the adjusted sum of net long/short position to calculate the foreign exchange risk capital charge.
Interest rate exposures
For the reporting of interest rate risk exposures in Part I.2 of the Return of Market Risk Exposures, a separate page, as is already provided, shall be used to report the exposures in the Euro for all the interest rate exposures in the participating national currencies.
Equity exposures
As national equity markets will continue to operate in the participating countries after the introduction of the Euro, the market-by-market criterion will continue to be used for the reporting of equity positions in Part II of the return. That is, offsetting of equity risk positions in the participating countries is not allowed.
