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Governor’s mandate for the management of the foreign reserves portfolio

Purpose

  1. The purpose of the foreign reserves management function (FRM) is to
    1. Manage the Bank’s foreign reserves portfolio, which comprises
      1. Foreign reserves – foreign currency assets held for FX market intervention; and
      2. Other foreign currency instruments, including foreign currency liabilities, held to meet FRM objectives.
    2. Undertake FX intervention consistent with a Governor’s or Minister of Finance’s Mandate issued from time to time.

Objectives

  1. FRM objectives are to actively manage the foreign reserves portfolio to:
    1. Meet the immediate liquidity needs for any FX market intervention;
    2. Maximise risk-adjusted net returns (minimise risk-adjusted net costs), subject to 2a; and
    3. Develop and maintain broad skills and an information network in foreign securities and foreign exchange markets to support the Bank’s capability for conducting foreign exchange intervention or responding to other crises, and to enhance our general understanding of financial markets, instruments and practices.

Foreign Reserves Levels

  1. Foreign reserves shall be maintained within the foreign currency intervention capacity range agreed by the Minister of Finance, pursuant to section 24 of the Reserve Bank of New Zealand Act 1989.

Performance Expectations

  1. FRM should achieve positive active management returns after adjusting for risk and additional operating costs associated with active management, on a rolling 3 year basis. Performance will also be monitored in accordance with the annual financial reporting cycle.

  2. Active management returns shall be measured as total FRM returns less benchmark returns. The benchmark for the core portfolio should measure the Bank’s lowest, risk-adjusted net dollar cost of holding foreign reserves, consistent with the Bank’s risk/return trade-offs for a passive, non-discretionary (rule based) portfolio.

Risk Management Policies And Procedures

  1. The foreign reserves portfolio should be maintained and managed in accordance with the Bank’s policies and procedures, consistent with the following strategic risk management objectives:
    1. Liquidity Risk:

      2. To ensure that foreign reserves comprise assets which are:
      1. diversified across US and Euroland currencies and instruments, but may, include assets in other currencies; and
      2. readily able to be converted into cash, if the Minister’s minimum foreign reserves were required to be liquidated within a month.

    2. Credit Risk:
      1. The Bank must hold capital to cover expected and unexpected losses on a portfolio basis.
      2. The Bank seeks to avoid undue credit risk while balancing practical, income and risk considerations.

    3. Market Risk:
      1. The Bank must hold sufficient capital to cover potential losses across the entire Bank’s portfolio resulting from market risks
      2. The Bank seeks to avoid undue market risk while meeting its policy and income objectives

    4. To maintain continuity of foreign currency intervention capacity.

    5. To avoid material refinancing risk (borrowing concentrations).

    6. To avoid material damage to the Bank’s reputation.

    7. To avoid material risk of legal disputes.

    8. To avoid material risk of loss due to fraud, error or oversight.

    Foreign Reserves Management Responsibilities

    1. Head of Financial Stability Department shall be responsible for:
      1. Management of foreign reserves portfolio (including funding);
      2. Advice and recommendations on risk management architecture and methodology;
      3. Compliance with risk management arrangements;
      4. Benchmarks; and

    2. Asset and Liability Committee shall
      1. Review, at least, quarterly:
        1. Structure of the foreign reserves portfolio;
        2. FRM active management performance; and
        3. FRM compliance with risk management policies and procedures.
      2. Provide independent advice on foreign reserves risk management architecture and methodology; and
      3. Review foreign reserves risk management practices.

    3. Chief Financial Officer shall be responsible for:
      1. To maintain continuity of foreign currency intervention capacity.
      2. Management reporting;
      3. Financial reporting;
      4. Monitoring compliance and risk; and
      5. Settlements.

    4. Head of Risk Assessment and Assurance shall be responsible for:
      1. Independent review of, and advice on, foreign reserves risk management architecture and methodology; and
      2. internal audit of foreign reserves management operations.

    Governor .................................................... Date ....................