ELM 3.4 Foreign exchange risk

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its absolute FX exposure limit.

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its FX exposure limit on more than:

1. (1)

   one day in any one week period; or

2. (2)

   two days in any one month period; or

3. (3)

   five days in any one year period;

ending on the day in question.

A firm'sFX exposure is its net FX open position multiplied by 8%.

A firm's net FX open position is calculated as follows:

1. (1)

   only take into account an asset, liability or other position that:

   1. (a)

      is denominated in, or gives rise to a position in, a foreign currency; and

   2. (b)

      forms part of its e-money outstandings or e-money float;

2. (2)

   items forming part of its e-money float must be valued in accordance with ELM 3.3.2 R;

3. (3)

   for each foreign currency:

   1. (a)

      sum the long and short positions;

   2. (b)

      calculate the net long or short position for that currency;

4. (4)

   convert each net position, long and short, into the firm's base currency at prevailing spot rates;

5. (5)

   sum all short positions and sum all long positions;

6. (6)

   the largest figure from (5) is the firm's net FX open position.

For the purposes of determining the currency in which a position is denominated, a firm must apply the following principles:

1. (1)

   where the price of an investment is quoted in only one currency, a position in that investment must be treated as denominated in that currency;

2. (2)

   where the price of an investment is quoted in more than one currency, a position in that investment must be treated as denominated in the currency in which the firm accounts for the investment.

A firm's absolute FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 2.5% of its e-money outstandings. If there is no such excess, the firm's absolute FX exposure limit is zero.

A firm's FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 3% of its e-money outstandings. If there is no such excess, the firm's FX exposure limit is zero.