The National Bank of Ukraine (NBU) has developed and approved a mechanism for provisioning under currency forward and futures contracts, which can be applied if needed to ensure financial stability. This instrument prevents the systemic risks related to the conclusion of contracts in which the variable is the exchange rate or the ratio of the banking metal price to the exchange rate.
The NBU Board takes the decisions to apply this mechanism. The above requirements for provisioning under forward and futures contracts will not apply, until a respective specific Board decision is approved.
In cases where the mechanism is applied, provisioning is required for all types of transactions under forward and futures contracts with or without the delivery of the underlying asset in which the variable is the exchange rate or the ratio of the banking metal price to the exchange rate.
In such cases, the reserves will be in the domestic currency, and an obligation of provisioning will occur from the day after the contract date and remain in effect until the day of final settlement under the contract or its termination. Moreover, the provisioning ratio will remain the same during the whole period of the contract. The requirement for provisioning will apply only to those contracts that have been concluded after the official introduction of the requirement by a specific Board decision.
The new mechanism will help avoid the risks of accumulating the currency imbalances that may arise from contracts on currency forward and futures transactions and will allow for a simultaneous control over banks meeting the reserve requirements and provisioning under such contracts.
The relevant steps are formalized by NBU Board Resolutions No.107 On Approval of Regulation On Procedure for Ukrainian Banks and Branches of Foreign Banks to Build and Maintain Reserves under Forward and Futures Contracts with or without Delivery of the Underlying Asset in which Variable is the Exchange Rate or the Banking Metal Price and No.108 On Approval of Amendments to Regulation On Procedure for Ukrainian Banks and Branches of Foreign Banks to Build and Maintain the Mandatory Reserves both dated 16 October 2018.
Both Resolutions come into effect on 19 October 2018. The decision to establish the mechanism is to be approved by a specific regulatory document that has to contain the respective due date.