Reserve Bank of Australia Annual Report – 2003 Financial Statements Note 18 – 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 Statement of Financial Position.

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 Statement of Financial Position restated in compliance with AAS33.

Interest rate risk As at 30 June 2003

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 1,333 316 630 366 21 1.2
Gold holdings 17 17 n/a
Sub-total 1,350  
Foreign exchange
Securities sold under repurchase agreements 6,530 3,190 3,340 3.0
Securities purchased under repurchase agreements 10,453 10,453 1.5
Deposits and other securities 27,741 941 8,950 5,000 9,313 3,284 253 1.8
Accrued interest – foreign exchange 205 205 n/a
Sub-total 44,929  
Australian dollar securities
Securities sold under repurchase agreements 1,303 563 740 4.7
Securities purchased under repurchase agreements 14,259 11,086 3,173 4.7
Other securities 3,263 1,635 2 802 824 4.6
Accrued interest – Australian dollar securities 108 108 n/a
Sub-total 18,933  
Property, plant & equipment 287 287 n/a
Cash and liquid assets 839 831 8 4.5
Loans and advances 25 25 3.3
Other 230 230 n/a
Total assets 66,593 1,797 32,440 8,805 14,234 8,188 1,129 2.7
Australian notes on issue 32,172 2,456 29,716 0.4
Deposits 14,736 2,490 12,200 46 4.6
Distribution payable to Australian Government 2,264 2,264 n/a
Other 8,007 7,833 174 1.5
Total liabilities 57,179 4,946 20,033 32,200 1.4
Capital and reserves 9,414              
Total balance sheet 66,593  
Off balance sheet items
Interest rate futures 72 72 n/a
Total assets 60,128 1,420 34,164 4,182 10,094 9,206 1,062 3.5
Total liabilities 50,618 6,142 13,071 31,405 1.4
Capital and reserves 9,510              
Total balance sheet 60,128              
Off balance sheet items 38 38 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, 2000/01, 2001/02 and 2002/03, 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 2003 was the equivalent of $66 million ($606 million at 30 June 2002), on which the RBA is earning a yield of 1.2 per cent (2.0 per cent in 2001/02). The swaps represent 0.1 per cent of the RBA's total assets as at 30 June 2003 (1.0 per cent at 30 June 2002). The remaining tranche of the swap was repaid in July 2003.

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

  1. Foreign exchange swaps – As at 30 June 2003 the RBA was under contract to purchase $16.0 billion of foreign currency and sell $43.1 billion of foreign currency. As of that date there was an unrealised net gain included in net profit of $2,089 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 2003 the amount of credit risk on interest rate futures contracts was approximately $0.8 million ($0.9 million at 30 June 2002). As at 30 June 2003 there was an unrealised loss brought to account on those contracts of $2.7 million ($42,000 unrealised loss at 30 June 2002).

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
Risk rating of security issuer* Risk rating of counterparties* % of total asset portfolio as at 2003 % of total asset portfolio as at 2002
Australian dollar securities
Holdings of Commonwealth Government securities AAA n/a 5.1 5.4
Securities sold under repurchase agreements AAA AA 1.5 1.7
AAA other 0.4 0.1
Securities held under repurchase agreements AAA AA 18.6 25.9
AAA other 1.0 1.2
AA AA 1.9 1.9
AA other 0.0 0.3
Foreign investments
Holdings of securities AAA n/a 25.3 29.8
AA n/a 8.1 5.4
Securities sold under repurchase agreements AAA AA 8.9 1.2
AAA other 0.9 1.5
Securities held under repurchase agreements AAA AA 14.8 9.7
AAA other 0.9 3.6
Deposits n/a AAA 0.6 1.2
n/a AA 7.8 6.0
n/a other 0.1 1.0
Gold loans n/a AAA 0.2 0.2
n/a AA 1.0 1.6
n/a other 0.8 0.5
Other     2.1 1.8
    100% 100%
* Standard & Poor's equivalent ratings