Reserve Bank of Australia Annual Report – 2001 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 Australian dollar 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. 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 2001

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
Gold loans 1,322 307 779 222 14 1.6
Gold holdings 59 59 n/a
Sub-total 1,381              
Foreign exchange
Securities sold under repurchase agreements  
Securities purchased under repurchase agreements 5,244 5,244 4.6
Deposits and other securities 30,222 391 12,206 2,947 6,787 7,750 141 3.1
Accrued interest – foreign exchange 320 320 n/a
Sub-total 35,786              
Australian dollar securities
Securities sold under repurchase agreements 1,654 396 485 773 4.8
Securities purchased under repurchase agreements 14,879 14,879 4.9
Other securities 3,174 1 910 1,194 1,069 5.3
Accrued interest – Australian dollar securities 107 107 n/a
Sub-total 19,814              
Property, plant & equipment 280 280 n/a
Cash and liquid assets 680 577 103 4.8
Other assets 172 35 137 3.4
Total assets 58,113 1,003 32,637 5,032 8,688 9,592 1,161 3.8
Australian notes on issue 27,168 27,168 n/a
Deposits 16,864 3,464 13,400 4.8
Profit distribution 2,834 2,834 n/a
Other 1,816 1,654 162 4.8
Total liabilities 48,682 3,464 15,054 30,164 1.9
Capital and reserves 9,431              
Total balance sheet 58,113              
Off balance sheet items
Interest rate futures (287) (287) n/a
Total assets 55,694 892 37,065 3,941 6,250 6,288 1,258 5.1
Total liabilities 46,728 6,286 13,107 400 26,935 2.4
Capital and reserves 8,966              
Total balance sheet 55,694              
Off balance sheet items (149) (379) 147 83 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.

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.

As part of an IMF support package during 1997/98, 1998/99, 1999/2000 and 2000/01 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 2001 was the equivalent of $1.4 billion Australian dollars ($1.4 billion at 30 June 2000), on which the RBA is earning a yield of 4.4% (6.15% in 1999/2000). The swaps represent 2.4% of the RBA's total assets as at 30 June 2001 (2.6% at 30 June 2000).

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

  1. Foreign exchange swaps – As at 30 June 2001 the RBA was under contract to purchase $16.7 billion of foreign currency and sell $45.6 billion of foreign currency. As of that date there was an unrealised net gain included in net profit of $256 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 its obligations.
  2. Interest rate futures – As at 30 June 2001 about 0.91% of the RBA's foreign currency reserves (excluding gold) were hedged through interest rate futures contracts. The amount of credit risk on these contracts was approximately $3.6 million ($2.5 million at 30 June 2000). As at 30 June 2001 there was an unrealised gain brought to account on those contracts of $0.3 million ($0.2 million unrealised loss at 30 June 2000).

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 30/6/01 % of total asset portfolio as at 30/6/00
Australian dollar securities
Holdings of Commonwealth Government securities AAA n/a 5.7 12.4
Securities sold under repurchase agreements AAA AA 2.8 0.0
Securities held under repurchase agreements AAA AA 24.0 24.4
AAA other 0.4 1.5
AA AA 0.9 2.7
AA other 0.3 0.2
Foreign investments
Holdings of securities AAA n/a 25.6 11.3
AA n/a 16.8 11.9
Securities sold under repurchase agreements AAA AA 0.0 5.4
AAA other 0.0 1.9
Securities held under repurchase agreements AAA AA 5.4 6.8
AAA other 3.6 3.9
Deposits n/a AAA 0.3 7.3
n/a AA 7.4 3.1
n/a other 2.4 2.7
Gold loans n/a AAA 0.3 0.3
n/a AA 1.5 1.4
n/a other 0.5 0.5
Other     2.1 2.3
    100% 100%
* Standard & Poor's equivalent ratings