BACKGROUND
Initiated by the South African banking industry, and after much lobbying, the regulator has now made changes to exchange control rulings, allowing for forward cover and currency contracts of less than six months to now be actively managed.
NEW RULINGS
- Hedges can now be swapped and re-established, and will not be viewed as speculative activity by the regulators.
- Economically inefficient hedges can be restructured.
- Administrative procedures have been eased. No proof of firm currency commitment is required before taking out a hedge, only on payaway.
- Only one set of documentation needs to be presented to payaway bank.
- These rules apply only to new contracts not exceeding six months or existing contracts with less than six month to maturity.
PREVIOUS RULINGS
- A hedging commitment/accrual could not be established without a firm foreign exchange commitment/accrual.
- Documentary proof had to be sent within 14 days to the relevant bank.
- Contracts could not be cancelled or changed if exchange rates fluctuated or if an exposure was reduced, as this was considered to be speculation.
COMMONLY ASKED QUESTIONS
1. How will active currency management be possible?
You can now adapt your initial hedged position according to changes in market conditions and/or your exchange rate view. Different or new hedging products such as translation risk, tenders, foreign exchange risk for foreign acquisitions can be traded by customers.2. Does this change apply to all exposure/hedging periods?
No. The change to existing exchange control rulings only applies to new contracts or new hedging strategies not exceeding six months or existing contracts of less than six months to maturity.
3. How do the changes affect previously excluded exposures?
Contingent exposures, anticipated payments/receipts and certain specified exposures could not previously be hedged. The change allows for any currency risk — actual, expected or implied — to be covered using forward exchange contracts (FECs) or currency option structures.
Some examples are:
- Service type payment/receipts
- Tenders
- Acquisitions
- Balance sheet risk
- Customs and excise duties
- Shareholders loans
- Dividends
- In fact – any direct foreign exchange exposure may be hedged. This still excludes speculative activity where no underlying foreign exchange exposure exists.
4. Does this change impact foreign currency balances and the hedging thereof?
Yes. Foreign currency balances may now be hedged against adverse currency movements or conversion to rand.
5. Can I unwind or restructure existing hedges?
The change in policy allows for existing hedges to be unwound, re-hedged and cancelled during the permissible period of six months or within a rolling six-month time frame.
6. Can I switch between hedging instruments in changing market conditions?
Yes. Active currency risk management is now permissible. This implies that an initial hedge in a forward contract can be restructured into a currency option strategy or vice versa to impact or re-align the final exchange rate of the hedge.
7. Is there a change in documentary requirements and the timing thereof?
Yes, definitely. There is no longer the requirement to prove firm and ascertainable currency commitment before taking out a hedge. Documentary proof of commitment or accrual no longer needs be presented at inception or within 14 days. Exchange control procedures will now move to the bank that affects the physical payaway overseas as opposed to the bank that establishes the hedging contract.
8. Can I monetise cash flows on existing hedges?
Hedges that fall within the six-month period can now be settled for cash or monetised. In other words, positive or negative mark-to-markets can be realised and the exposure then brought back to market-related prices or re-hedged into new structures. Positive cash flows, for example, could be used to subsidise future exposures.
9. Will this change impact my treasury policy and mandate?
Treasury hedging policies and mandates could be updated to accommodate the ability to be actively in and out of the market rather than a "hedge on invoice" policy, for example.
10. How will this change impact my facilities and credit limits?
An actively managed exposure will still be limited to trading within facility or credit limits with Rand Merchant Bank. An increased utilisation of such limits could be minimised by signing a standard International Swaps and Derivatives Association (ISDA) contract.
11. Is active currency management available to institutional investors?
Yes it is. However, any position as a result of entering into the in-between trades is regarded as foreign exposure and must accordingly be marked off against the respective foreign portfolio investment allowances as well as being accounted for in the quarterly asset allocation reports.
12. Will authorised dealers be reporting on in-between trades?
Yes, all authorised dealers facilitating trades must furnish monthly reports indicating volumes, value and ownership, differentiating between investor classes.
13. What is the focus of exchange control rulings going forward?
Exchange control rulings will continue to focus on the protection of the export of capital from South Africa. The new dispensation allows for more active currency management. However, the final offshore payment will have to have the appropriate documentary proof.
14. Can I hedge my dividends?
South African entities declaring and paying dividends in rand will not be able to hedge the exposure. This is still applicable where the dividend is converted into currency and paid to the offshore shareholder. As the shareholder has introduced rand into the country to purchase the shareholding, they are entitled to rand dividends and may hedge the exposure offshore. The South African entity has no currency risk exposure.
A South African holding company receiving dividends from an offshore subsidiary may hedge this exposure. The dividends are received in currency and are required to be converted. As such, there is a currency exposure that may be hedged.
15. Will I be forced to present value (PV) and realise the cash flow on an FEC?
No. Where a client cancels a contract or performs an early drawdown prior to the FEC maturity date, the client may elect to realise the cash flow at spot or on the original maturity date. Where clients wish to move from an FEC to an option instrument, the cash flow will have to be realised at spot. The cash flow can be utilised to pay a premium or be built into an option structure. Where a client is extending a contract that is maturing, the negative cash flow cannot be carried to the new maturity date.
CONTACTS
Customer Dealing:
| Gauteng KwaZulu Natal Eastern Cape Western Cape |
+27 11 269 9190/9230 +27 31 580 6410 +27 41 374 1750 +27 21 658 9333 |
FICC Structuring Desk |
+27 11 269 9150 |
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