Q1: On August 3rd, 2018, the People’s Bank of China (PBC) released the Notice on Adjusting Policies on Foreign Exchange Risk Reserves (PBC Notice No. 190 [2018]). Could you explain the coverage of such foreign exchange (FX) risk reserve?

A: According to the Notice on Adjusting Policies on Foreign Exchange Risk Reserves (PBC Notice No. 190 [2018]), FX risk reserves are required for the following businesses: (1) FX forward sales on behalf of clients by domestic financial institutions (FIs); the clients’ call, put or option strategy; FX swaps and money swaps where the clients will collect foreign currency at a future date with no exchange of the principal in the short term; other FX forward purchases for the clients.(2) Domestic FX hedging positions by overseas FIs due to the above-mentioned businesses overseas. (3) Forward transactions involving RMB purchases and sales.

Q2: Is FX risk reserve required for the extension of FX forward sales on behalf of their clients?

A: FX risk reserve is not required for the extension of FX forward sales on behalf of clients.

Q3: Is FX risk reserve required for the Non-Deliverable Forward (NDF) on behalf of clients?

A: FX risk reserve is required for NDF on behalf of clients, and the full notional principal in the contract signed between the bank and the client should be used as the basis for the FX risk reserve requirement calculation and deposit.

Q4: How to calculate FX risk reserve for option/option strategy?

A: Half of notional principal in option and option strategy (as for option strategy, the highest notional principal of a single option should be adopted in the calculation) should be used to calculate FX risk reserves.

Q5: How to calculate FX risk reserve for FX forward by foreign institutional investors in the Chinese security market?

A: Firstly, FX forward initiated by foreign institutional investors for hedging the FX risk exposure caused by approved cross-border security investment are not included in the FX risk reserve requirement at current stage. The approved cross-border security investment mainly include: Shanghai-Hong Kong Connect, Shenzhen-Hong Kong Connect, Bond Connect, Chinese interbank bond market investment specified in PBC Notice No. 3 [2016] and domestic security investment by Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII), etc.

Secondly, for now, FX forward with foreign central banking agencies is not included in the scope of FX risk reserve requirement. Foreign central banking agencies include foreign central banks (monetary authorities and other official reserve management institutions), international financial organizations and sovereign wealth funds.