Reserve Bank of Australia Annual Report – 2004 Financial Statements Note 18 – Financial Instruments

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 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. 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 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 AASB1033.

Interest rate risk As at 30 June 2004

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
Assets
Gold loans 1,454 – 165 166 1,104 – 19 1.2
Gold holdings 38 – – – – – 38 n/a
Sub-total 1,492  
Foreign exchange
Securities sold under repurchase agreements 5,635 – – – 3,318 2,317 – 3.9
Securities purchased under repurchase agreements 19,283 – 19,283 – – – – 1.3
Deposits and other securities 26,948 655 11,540 4,003 6,169 3,551 1,030 2.1
Accrued interest – foreign exchange 185 – – – – – 185 n/a
Sub-total 52,051  
Australian dollar securities
Securities sold under repurchase agreements 1,679 – – – 822 857 – 5.1
Securities purchased under repurchase agreements 13,645 – 13,320 325 – – – 5.3
Other securities 2,919 – 1,681 176 571 491 – 5.3
Accrued interest – Australian dollar securities 74 – – – – – 74 n/a
Sub-total 18,317  
Property, plant & equipment 293 – – – – – 293 n/a
Cash and liquid assets 623 617 – – – – 6 5.0
Loans and advances 23 23 – – – – – 3.8
Other 274 – – – – – 274 n/a
Total assets 73,073 1,295 45,989 4,670 11,984 7,216 1,919 2.9
Liabilities
Australian notes on issue 34,022 2,351 – – – – 31,671 0.3
Deposits 18,126 2,860 14,850 – – – 416 5.2
Distribution payable to Australian Government 1,658 – – – – – 1,658 n/a
Other 8,411 – 8,146 11 – – 254 2.0
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
Interest rate futures 1,386 – – – – 1,386 – n/a
Total assets 66,593 1,797 32,440 8,805 14,234 8,188 1,129 2.7
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 72 – – – – 72 – 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.

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

  1. Foreign exchange swaps – As at 30 June 2004 the RBA was under contract to purchase $9.3 billion of foreign currency and sell $34.8 billion of foreign currency. As of that date there was an unrealised net loss of $797 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 2004 the amount of credit risk on interest rate futures contracts was approximately $1.4 million ($0.8 million at 30 June 2003). As at 30 June 2004 there was an unrealised gain brought to account on those contracts of $0.3 million ($2.7 million unrealised loss at 30 June 2003).

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 (refer Note 1(c)).

Credit Risk
Risk rating of security issuer* Risk rating of counterparties* % of total assets
as at 2004		 % of total assets as at 2003
Domestic Government Securities
Holdings of Commonwealth Government securities AAA n/a 2.8 5.1
Holdings of Semi Government securities AAA n/a 0.9 0.0
AA n/a 0.4 0.0
Securities sold under repurchase agreements AAA AAA 1.6 0.0
AAA AA 0.7 1.5
AAA other 0.0 0.4
Securities held under repurchase agreements AAA AA 11.7 18.6
AAA other 0.6 1.0
AA AA 4.6 1.9
AA other 1.0 0.0
other other 0.7 0.0
Foreign investments
Holdings of securities AAA n/a 20.4 25.3
AA n/a 3.7 8.1
A n/a 0.1 0.0
Securities sold under
repurchase agreements		 AAA AA 6.2 8.9
AAA other 1.6 0.9
Securities held under
repurchase agreements		 AAA AA 20.2 14.8
AAA other 6.2 0.9
Deposits n/a AAA 0.3 0.6
n/a AA 12.6 7.8
n/a other 0.0 0.1
Other n/a AAA/other 0.1 0.0
Gold loans n/a AAA 0.1 0.2
n/a AA 1.1 1.0
n/a other 0.8 0.8
Other     1.6 2.1
    100 100
* Standard & Poor's equivalent ratings