Reserve Bank of Australia Annual Report – 2005 Financial Statements Note 18


Australian Accounting Standard AASB1033 – Presentation and Disclosure of Financial Instruments 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 RBA are its Australian dollar securities, its foreign government securities, bank deposits, interest rate futures, foreign currency swap contracts, gold loans, cash and liquid assets, notes on issue and deposit liabilities.

Net 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 recognised financial instruments are carried at current market value which approximates net fair value.

Financial riskof financial instruments embodies price risk (currency risk and interest rate risk); credit risk; liquidity risk and cash flow risk. AASB1033 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 riskis 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 AASB1033.

Interest rate risk
As at 30 June 2005
Balance sheet
total $M
rate $M
Repricing Period $M Not
interest $M
rate %
0 to 3 months 3 to 12 months 1 to 5 years Over 5 years
Gold loans 1,217 147 92 952 26   1.3
Gold holdings 277 277   n/a
Sub-total 1,494                
Foreign exchange
Securities sold under
repurchase agreements
7,629 363 3,971 3,295   3.4
Securities purchased
under repurchase agreements
29,301 29,301   3.0
Deposits and other
23,810 613 11,935 2,670 5,366 2,337 889   2.7
Accrued interest – foreign
188 188   n/a
Sub-total 60,928                
Australian dollar securities
Securities sold under
repurchase agreements
573 30 170 373   5.1
Securities purchased
under repurchase agreements
16,569 16,569   5.5
Other securities 3,688 1,060 53 1,561 1,014   5.2
Accrued interest –
Australian dollar securities
70 70   n/a
Sub-total 20,900                
Property, plant &
313 313   n/a
Cash and liquid assets 1,008 992 16   5.5
Loans and advances 21 21   3.7
Other 295 295   n/a
Total assets 84,959 1,626 59,012 3,208 12,020 7,019 2,074   3.6
Australian notes on issue 35,624 2,376 33,248   0.3
Deposits 29,228 2,808 24,100 1,350 970   5.3
Distribution payable to
Australian Government
1,683 1,683   n/a
Other 8,866 8,545 4 317   2.5
Total liabilities 75,401 5,184 32,645 1,354 36,218   2.5
Capital and reserves 9,558                
Total balance sheet 84,959                
Off balance sheet items
Interest rate futures 65 65   n/a
Total assets 73,073 1,295 45,989 4,670 11,984 7,216 1,919   2.9
Total liabilities 62,217 5,211 22,996 11 33,999   2.0
Capital and reserves 10,856                
Total balance sheet 73,073                
Off balance sheet items 1,386 1,386   n/a

Other liabilities include amounts outstanding under sell 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.

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

  1. Foreign exchange swaps– As at 30 June 2005 the RBA was under contract to purchase $6.3 billion of foreign currency and sell $36.0 billion of foreign currency. As of that date there was an unrealised net loss of $1.0 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.
  2. Interest rate futures As at 30 June 2005 the amount of credit risk on interest rate futures contracts was approximately $0.3 million ($1.4 million at 30 June 2004). As at 30 June 2005 there was an unrealised gain brought to account on those contracts of $0.1 million ($0.3 million unrealised gain at 30 June 2004).

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)).

Credit Risk
Risk rating of
security issuer*
Risk rating of
% of total assets
as at 2005
% of total assets
as at 2004
Domestic Government Securities
Holdings – Commonwealth Government securities AAA n/a 2.9 2.8
Holdings – Semi Government securities AAA n/a 1.1 0.9
AA n/a 0.3 0.4
Securities sold under repurchase agreements AAA AAA 0.0 1.6
AAA AA 0.5 0.7
AAA other 0.2 0.0
Securities held under repurchase agreements AAA AA 17.4 11.7
AAA other 1.7 0.6
AA AA 0.2 4.6
AA other 0.2 1.0
other other 0.0 0.7
Foreign investments
Holdings of securities AAA n/a 12.0 20.4
AA n/a 3.0 3.7
A n/a 0.4 0.1
Securities sold under repurchase agreements AAA AA 8.5 6.2
AAA other 0.6 1.6
Securities held under repurchase agreements AAA AA 32.0 20.2
AAA other 2.5 6.2
Deposits n/a AAA 1.1 0.3
n/a AA 10.1 12.6
n/a other 1.2 0.0
Other n/a AAA/other 0.3 0.1
Gold loans n/a AAA 0.1 0.1
n/a AA 0.7 1.1
n/a other 0.6 0.8
Other     2.4 1.6
    100 100
* Standard & Poor's equivalent ratings