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# ELM 3.4 Foreign exchange risk

ELM 3.4.1R

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its absolute FX exposure limit.

ELM 3.4.2R

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its FX exposure limit on more than:

1. (1)

one day in any one week period; or

2. (2)

two days in any one month period; or

3. (3)

five days in any one year period;

ending on the day in question.

## Calculation of FX exposure

ELM 3.4.3R

A firm'sFX exposure is its net FX open position multiplied by 8%.

ELM 3.4.4R

A firm's net FX open position is calculated as follows:

1. (1)

only take into account an asset, liability or other position that:

1. (a)

is denominated in, or gives rise to a position in, a foreign currency; and

2. (b)

forms part of its e-money outstandings or e-money float;

2. (2)

items forming part of its e-money float must be valued in accordance with ELM 3.3.2 R;

3. (3)

for each foreign currency:

1. (a)

sum the long and short positions;

2. (b)

calculate the net long or short position for that currency;

4. (4)

convert each net position, long and short, into the firm's base currency at prevailing spot rates;

5. (5)

sum all short positions and sum all long positions;

6. (6)

the largest figure from (5) is the firm's net FX open position.

ELM 3.4.5R

For the purposes of determining the currency in which a position is denominated, a firm must apply the following principles:

1. (1)

where the price of an investment is quoted in only one currency, a position in that investment must be treated as denominated in that currency;

2. (2)

where the price of an investment is quoted in more than one currency, a position in that investment must be treated as denominated in the currency in which the firm accounts for the investment.

## FX exposure limits

ELM 3.4.6R

A firm's absolute FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 2.5% of its e-money outstandings. If there is no such excess, the firm's absolute FX exposure limit is zero.

ELM 3.4.7R

A firm's FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 3% of its e-money outstandings. If there is no such excess, the firm's FX exposure limit is zero.

ELM 3.4.8G

The effect of ELM 3.4.1 R and ELM 3.4.2 R is that a firm should not generally have any FX exposure unless its own funds exceed 3% of its e-money outstandings.

ELM 3.4.9G

If a firm'sown funds are 2.5% or less of its e-money outstandings, the firm should not have any FX exposure.

ELM 3.4.10G

If the firm'sown funds are between 2.5% and 3% of its e-money outstandings, it should not in general have any FX exposure, but may occasionally have an FX exposure as long as it does so no more frequently than set out in ELM 3.4.2 R. The FX exposure must not exceed the amount by which its own funds exceed 2.5% of its e-money outstandings.

ELM 3.4.11G

If the firm's own funds exceed 3% of its e-money outstandings, it may have an FX exposure of up to the amount of that excess. It may exceed that limit by up to ?% of its e-money outstandings, but only if it does so occasionally, in accordance with ELM 3.4.2 R.

ELM 3.4.12G

The limits in ELM 3.4.2 R are cumulative. Therefore, for example, if a firm exceeds its FX exposure limit more than once in a one week period, the firm will breach ELM 3.4.2 R even though it is within the limits in ELM 3.4.2 R (2) and (3).