Reserve Bank of Australia Annual Report – 1998 Financial Statements Note 15 – Financial instruments

Australian Accounting Standard AAS 33 Presentation & Disclosure of Financial Instruments applies to reporting periods from 31 December 1997 and is applicable to the Bank for the first time in the 1997/98 Financial Statements. The standard 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 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.

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 1998

Balance Sheet Total $ million Floating
Rate $ million
Repricing Period $ million Not
Interest $ million
Rate %
0 to 3
3 to 12
1 to 5
Over 5
Gold loans 1,145 587 372 186 1.8
Gold holdings 92 92 n/a
Foreign Exchange
Securities sold under repurchase agreements 1,405 161 228 1,016 5.2
Securities purchased under repurchase agreements 9,969 9,969 4.7
Deposits and other securities 12,656 4,323 2,225 3,524 2,317 267 4.3
Accrued interest foreign exchange 167 167 n/a
Domestic Government Securities
Securities sold under repurchase agreements 445 164 281 5.4
Securities purchased under repurchase agreements 9,094 9,094 5.0
Other securities 11,296 4,076 4,047 1,772 1,401 5.0
Accrued interest domestic government securities 177 177 n/a
Loans advances and bills discounted 96 78 18 3.4
Bank premises and other durable assets 274 274 n/a
Clearing items 284 284 n/a
Australian notes and coin 85 85 n/a
Other assets 125 125 n/a
Total Assets 47,310 78 28,210 6,644 5,874 5,015 1,489 4.6
Australian notes on issue 21,651 21,651 n/a
Deposits 11,073 11,073 2.7
Profit distribution 2,726 2,726 n/a
Provisions 78 78 n/a
Other 1,953 1,887 66 4.3
Total Liabilities 37,481 11,073 1,887 24,521 1.0
Capital and Reserves 9,829 n/a
Balance Sheet
Off Balance Sheet Items
Interest Rate Futures* (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 $1.7 billion has a maturity period of 1 to 5 years

Approximately $90 million has a maturity period of over 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 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 1998 was the equivalent of 1.2 billion Australian dollars, on which the Bank is earning a yield of 5.33%. The swaps represent 2.5% of the Bank's total assets as 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 1998 the Bank was under contract to purchase $6.5 billion of foreign currency and sell $14.2 billion of foreign currency. As of that date there was an unrealised net gain of $79.8 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 1998 about 9% 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 $9.3 million. As at 30 June 1998 there was an unrealised gain on those contracts of $1.4 million.

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(b), 1(c) and 1(d).

Credit Risk Table
Security type Risk rating of security issuer* Risk rating of counterparties* % of total asset portfolio
Domestic government securities
Holdings of Commonwealth Government Securities AAA n/a 24.2
Securities sold under repurchase agreements AAA AAA 0.2
AAA AA 0.5
AAA other 0.3
Securities held under repurchase agreements AAA AAA 3.6
AAA AA 10.0
AAA other 2.7
AA AAA 0.1
AA AA 2.1
AA other 0.7
other other 0.2
Foreign investments
Holdings of securities AAA n/a 18.1
Securities sold under repurchase agreements AAA AA 2.6
AAA other 0.5
Securities held under repurchase agreements AAA AA 13.4
AAA other 9.5
Deposits n/a AAA 0.6
n/a AA 4.2
n/a other 2.5
Gold loans n/a AAA 0.3
n/a AA 0.7
n/a other 1.4
Other     1.6
* Standard & Poor's ratings