IBANK 6.2.2 What to Include in Foreign Exchange Risk

(1) In calculating the capital charge for foreign exchange risk, an Islamic banking business firm must include in its exposure to each foreign currency:
(a) the net spot position (that is, assets minus liabilities denominated in the currency, including accrued profit and other accrued income and accrued expenses);
(b) the net position of binding unilateral promises by the firm to buy or sell currencies on a specified future date (that are not included in the spot position);

Examples of amounts to be received or paid
•   the principal on currency swaps not included in the spot position
•   profit from swaps and other profit rate transactions.
(c) irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable; and
(d) any other items representing an exposure to risk in foreign currencies (for example a specific provision held in the currency in question where the underlying asset is held in a different currency).
(2) The firm may also include in its currency exposure any net future income or expenses that are not yet accrued but already fully hedged. If the firm includes such income or expenses, it must do so consistently and must not select only expected future flows that reduce its position.
(3) If the firm has deliberately taken a position to partly or totally protect itself against the adverse effect of a change in an exchange rate on its capital adequacy ratio, it may exclude the position from its currency exposure insofar as it relates to that hedge, if:
(a) the position is of a structural and non-trading nature;
(b) the structural position does no more than protect the firm's capital adequacy ratio;
(c) the position cannot be traded for speculative or profit-making purposes; and
(d) the exclusion of the position is done consistently, with the treatment of the hedge remaining the same for the life of the assets or other items.
(4) A structural position includes:
(a) a position arising from an instrument that satisfies the criteria for inclusion as capital under Chapter 3;
(b) a position in relation to a net investment in a self-sustaining subsidiary, the accounting consequence of which is to reduce or eliminate what would otherwise be a movement in the foreign currency translation reserve; and
(c) an investment in an overseas subsidiary or other entity in the same corporate group as the firm that, under these rules, is deducted from the firm's capital for capital adequacy purposes.
(5) The firm must also include any currency exposures arising from equity, commodity and profit rate positions.
Derived from QFCRA RM/2015-2 (as from 1st January 2016).