ECCB 2015/2016 Annual Report

EASTERN CARIBBEAN CENTRAL BANK

NOTES TO FINANCIAL STATEMENTS

Eastern Caribbean Central Bank Notes to Financial Statements March 31, 2016 (expressed in Eastern Caribbean dollars)

Eastern Caribbean Central Bank Notes to Financial Statements March 31, 2016

March 31, 2016

3.

(expressed in Eastern Caribbean dollars) Financial risk management … continued

(expressed in Eastern Caribbean dollars) 3. Financial risk management … continued c) Market Risk Market Risk c)

3. Financi l risk management … continued c) Market Risk

The Bank is exposed to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. The Bank’s reserve management mandate permits investment in a number of instruments. The Bank is exposed to general and specific market movements and volatility of market rates and prices such as interest rates, credit spreads and foreign exchange rates. The Bank enters into currency forward contracts to manage its exposure to fluctuations in foreign exchange rates for non-USD securities. The Bank also has a structured management process which entails the following:  Careful monitoring of the international market and taking positions to achieve objectives  Regular reporting to internal management committees and to the Board of Directors i) Interest rate risk The Bank invests in securities and money market instruments and maintains demand deposit accounts as a part of its normal course of business. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is the risk of loss arising from changes in prevailing interest rates. The Bank manages this risk by monitoring interest rates daily, and seeks to minimize the exposure by devising a comprehensive risk assessment and tolerance strategy known as “Customised benchmarking”. The effect of this tool is to reflect the risk tolerance level of the Bank and to measure the performance of portfolio managers. The table below analyses the effective interest rates for each class of financial asset and financial liability: 2016 2015 % % Foreign Assets Money market instruments and money at call 0.31 0.25 Available-for-sale - foreign investment securities 1.63 1.82 Domestic Assets Balances with local banks 0.01 0.05 Due from local banks 6.50 6.50 Term deposits 2.50 2.50 Loans and receivables - participating governments’ securities 5.63 5.45 Loans and receivables - participating governments’ advances 6.50 6.50 Liabilities Term deposits, call accounts and government operating accounts - - Demand and deposit liabilities - foreign - -  Ca eful monitoring of the inte na io al market and taking pos tions to achi ve objectives  Regular reporting to int rnal managem nt commi t es and t the Board of Directors i) Interest rate risk The Bank inves s in securiti s and money marke instru ents and mai tains demand deposit ccounts as a part of its normal cour e of business. Cash flow intere t rate risk is the risk that the future cash flows of a financial instrument will fl ctuate becau e of changes in ma ket interest rates. Fair valu intere t rate risk is t e risk that the v lue of a financial instrument will fluctuate because of changes in marke interest rates. Interest rate risk is the risk of loss arising from changes in prevailing interest r tes. The Bank manages this risk by monito ing interest rate daily, and seeks to minimize the exposure by devising a comprehensive risk assessment and tolerance strategy known as “Customised benchmarking”. The effect of this tool is to reflect the risk tolerance level of the Bank and to m asure the performance of portfolio manag rs. The table below analyses the effective inter st rates for each class of fin cial sset and f nancial liability: 2016 2015 % % Foreign Assets Mo ey market i struments and money at call 0.31 0.25 Av ilable-for-sale - foreign inves ment securities 1.63 1.82 Domestic Assets Ba ances with local banks 0.01 0.05 Due from local banks 6.50 6.50 Term deposits 2.50 2.50 Loans and receivables - participating governments’ securities 5.63 5.45 Loans and receivables - participating governm nts’ advances 6.50 6.50 Liabilities Term deposits, c ll accounts and government operating accounts - - Demand and deposit liabilities - foreign - - The Bank is exposed to market risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. The Bank’s reserve management mandate permits investm nt in a nu ber of instruments. T Bank is exposed to gene al and specific market movements and volatility of market rates and prices such as interest rates, credit spreads and foreign exchange rates. The Bank enters into currency forward contracts to manage its exposure to fluctuations in foreign exchange rates for non-USD securities. The Bank also has a structured management process which entails the following: — — Careful monitoring of the international market and taking positions to achieve objectives — — Regular reporting to internal management committees and to the Board of Directors e ank invests in securities and money market instruments a d maintains demand deposit acc unts as a art of its ormal course of business. Cash flow interest rate risk i the risk th t the future cash flows of a financial instrument will flu tuate be ause of changes in market int rest rates. Fair value inter st rate ris is th ri k that the value of a financial instrument will fluctuate because of changes in arket interest rates. Interest rate risk is the risk of loss arising from changes in prevailing interest rates. The Bank manages this risk by monitoring interest rates daily, and seeks to minimize the exposure by devising a comprehensive risk assessment and tolerance strategy known as “Customised benchmarking”. The effect of this tool is to reflect the risk tolerance level of the B n an t m as e the erfor ance of portfolio an gers. e t ble b low analyses the ef ective t e h class of fi ancial a s t d fina cial li bility: The Bank is exposed to market risk, which is the risk th t the fair value or uture cash flows of a financial instrument will fluctuate due to changes n market prices. Th Bank’s reserve management andate permits vestment in a number of instruments. The Bank is exposed to general and specific market movements and vol tili y of m rket rates and prices such s inte st rates, credit sp ads and foreign exchange r tes. The Bank ent rs int cur en y forward contracts o manage its expos re to fluctuat o s in foreign exchange rates for non-USD securities. The Bank also has a structur d management process w ich entails the following:

i) Interest rate risk

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ECCB A nnual R eport 2015/2016