Patrick El Hajj, CFA
Head of Investment Division
Foreign Exchange & Int. operations Department
Summer 2017
Role of the Central Bank
1. Currency issuance: The Central Bank prints and issues notes and coins.
2. Banker to the banks: It provides a payment system for the transactions between banks and intraday liquidity.
3. Banker to the government.
4. Banking supervision : The Central Bank regulates the banking system to seek to maintain financial stability. (Compliance Department , Legal Department ,Banking Control Commission, Special Investigation Commission, Capital Market Authority)
5. Maintains financial stability: The Central Bank is the
Lender of last resort. It provides emergency liquidity assistance to financial institutions that might otherwise collapse, damaging the economy as a whole.
6. Monetary policy function: increasing and decreasing the
money supply by using 3 tools : Interest rate, open market operations and reserve requirement ratio.
7. Reserve Management: The Central Bank manages the portfolio of foreign exchange reserves of the country and may buy or sell them to influence the exchange rate (Intervention).
Role of the Central Bank
Foreign Exchange & International Operations Department
We have 5 divisions in the Department:
1. The Transfer Division
2. The Documentary Credit Division- LC
3. The Back Office
4. The Dealing Room
5. The Communication Division (SWIFT: Society for Worldwide
Interbank Financial Telecommunication)
Foreign Exchange & International Operations Department
Back Office Division
A - Cross Border Transfers in Both Directions
1. Inflows 2. Outflows
B - Swift Preparations
1. Payment orders 2. Confirmations
C - Accounting
Correspondents
Country Banque Du Liban Audi Bank Byblos BankUSD USA Federal Reserve Bank of NY/ Standard Chartered Bank NY Bank of New York Mellon,NY CitiBank NY
EURO EUROPE Banque De France , Paris Deutsche Bank Frankfurt Credit Agricole Paris
JPY JAPAN Bank of Japan ,Tokyo Sumitomo Bank ,Tokyo Bank of Tokyo Mitsubishi, Tokyo
GBP UK Bank of England Barclays Bank , London Standard Chartered Bank ,LondonCo
rre
sp
on
de
nt
Cross Border Transfers - Outflows
Byblos Bank sends a request to BDL to transfer USD 4.5 Millions from his account with BDL to his account with Citibank New York, NY (Byblos Bank account at BDL is Debited by USD 4.5 Millions)
Byblos Bank BDL
Citibank NY, USA Standard Chartered
Bank NY ,USA
MT 200 ( Request to transfer
funds for own accounts )
Transfer USD 4.5 Millions Beneficiary Byblos Bank
MT 202 (Financial institutions transfer ) Transfer USD 4.5 Millions to Citibank NY ,
beneficiary Byblos Bank
MT 910 (Confirmation of Credit )
Cross Border Transfers - Inflows
Audi Bank sends a notice to receive to BDL informing him that he will receive USD 20 Millions at his account with the Fed NY from the Bank of New York, NY US (Audi Bank account at BDL is credited by USD 20 Millions)
Audi Bank BDL
Bank of New York Mellon , NY US
Fed NY
MT 210 ( Notice to Receive) USD 20 Millions
Transfer USD 20 Millions Beneficiary Banque Du Liban
MT 910 (Confirmation of Credit )
MT 202 (Financial institutions transfer )
Transfer USD 20 Millions to the Federal Reserve Bank
of NY , beneficiary Banque Du Liban
International Reserves Assets
FX Reserves : These are assets of the central bank held in different reserve currencies, mostly the US Dollar, and to a lesser extent the euro, the UK pound, the Japanese yen and other foreign currencies. ( Total = 11.098 Trillion USD )
Gold Reserves (Total = 1073.82 Million Troy Oz )
BDL Gross FX Reserves is around 41 Billion US Dollars.
Gold Reserve 9.22 Million Oz (Ranked 15th with around 0.86 % of the World Gold Reserves )
International Reserve Assets Composition
64%
19.7%
4.2%
4.4% 2%
1.8% 0.2%
2.5%
Structure of Currencies in the Global Reserves – Dec 2016
USD EUR JPY GBP CAD AUD CHF Other
261.5
108.7
78.8 78.3
59.2 54.2
33.4 24.6 19.7 17.9 14.2 12.3 10.4 10.0 9.2
0
50
100
150
200
250
300
Official Gold Reserves by millions of Troy Ounces
4.11
2.17
1.35
1.31
1.19
1.18
1.17
1.06
0.83
0.68
0.65
0.58
0.52
0.42
0.38
0.34
0.33
0.33
0.24
0.20
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50
Switzerland
Lebanon
Germany
Italy
France
Portugal
Netherlands
Austria
USA
Kuwait
Belgium
Libya
Cyprus
Sweden
Denmark
KSA
Greece
Russia
Venezuela
Turkey
Official Gold Reserves Per Capita Holdings
Foreign Exchange Reserves
3054
1189
702
490 440 400 368 367 358 327 258 176 166 139 120 119 107 106 95 87 86 76 72 64 41 40
0
500
1000
1500
2000
2500
3000
3500
Why Do Countries Hold Reserves?
Exchange rate targeting : Ex: Lebanon and Switzerland The Central Bank of Lebanon has set a range for the LBP 1501-1514 .The
USD/LBP exchange rate has been trading within that range since 9-9-1999.
Whereas the Swiss National Bank has set a floor for the EUR/CHF at 1.20 on the 6th of September 2011 and removed it on the 14th of Jan 2015.
Exchange rate stability: Central Banks could intervene to reduce the volatility
in the FX market.
Store of national wealth Sovereign rating :The higher the FX reserve the better the sovereign rating
of a country the lower the borrowing cost.(Lebanon 10 years USD borrowing cost around 6.5%)
Used to avoid financial crises : The Central Bank can use its reserves in time of crisis to pump liquidity into the market. (Ex: China & KSA)
China Foreign Exchange Reserve
2014 Peak USD 4 Trillion
Russia Foreign Exchange Reserve
Kingdom of Saudi Arabia Foreign Exchange Reserve
Peak Aug 2014 around
USD 730 Billion
Switzerland Foreign Exchange Reserve
BDL's Foreign Exchange Reserves
EUR/CHF - Sep 2011 vs. Jan 2015
0
500
1,000
1,500
2,000
2,500
3,000
198
3010
319
86
052
219
86
1110
198
7051
119
871
124
198
80
620
198
90
110
198
90
929
199
00
522
199
1010
419
910
723
199
2020
319
920
828
199
3031
219
931
00
119
94
04
1819
94
110
219
950
529
199
5121
119
96
070
419
970
114
199
708
04
199
80
213
199
80
90
319
99
031
719
99
09
2820
00
04
1220
00
1027
200
1052
420
011
203
200
206
2420
030
107
200
3072
820
04
021
220
04
08
2520
050
317
200
510
03
200
60
420
200
610
3120
070
518
200
7112
620
08
06
1820
09
010
820
09
072
420
100
205
2010
08
1920
110
309
2011
09
2220
120
410
2012
1019
2013
051
320
1311
2620
140
612
USD/LBP Graph 1983 - 2017
Dealing Room
Types of Traders
Forex Traders
Money Market Traders (< 1 year )
Capital Market Traders ( > 1 year )
Equity traders
Fixed Income Traders
Commodities Traders
Derivative Traders
Options Traders
Swap Options Traders
Future Traders
Etc……
BDL Foreign Reserve Currency Composition
U.S. Dollar (More than 80%)
EURO
Pound / Sterling
Japanese Yen
Swiss Francs
Other Arab Currencies
Foreign Reserve Composition
Net Reserve (BDL own funds )
Local Banks Deposits ( RR or Excess Reserves) Ex: Local banks place term deposits at the central bank to cover their 15 % RR in USD )
International Central Banks Deposits Ex: Arab Central Banks
Certificate of Deposits issued by BDL
Other Liabilities
Where Do We Invest Our Reserves (USD 41 Billion)?
Reserve managers main objectives is capital preservation and liquidity, however lately a higher emphasis on returns has been observed .
The strategic asset allocation is decided on the investment committee levels.
A certain amount is kept with our correspondents to cover our liquidity needs and the rest is managed on a daily basis ( Working Capital Tranche) .
Placements with investment grade banks and Central Banks . A portion of our reserve is invested with a list of investment grades commercial banks selected by our Risk Department . The investments are made for different time periods going from one day up to 3 years depending on our liquidity needs and market expectations.
Treasury bills, notes and bonds (AA rated Countries and above ).
Commercial papers (Supranational institutions & agencies AAA rated).
Lebanese Republic Eurobonds.
Working Capital
Short-Term Tranche
Medium-Term Tranche
Long-Term Tranche
BDL Foreign Exchange Reserve Portfolio
Central Banks Asset Classes
0
10
20
30
40
50
60
70
80
90
The higher the risk the higher the return
Type of Instruments
BDL Investments:
Time deposits
Certificate of Deposits
Euro Commercial Papers -ECP
Supranational institutions Bills & Notes
Government Guaranteed Agencies Bills and Notes
Treasury Bills, Notes , Bonds
All our investments are made on Reuters dealing 3000 and Bloomberg, which are systems that link all the treasury desks around the world together.
Reuters Dealing and Bloomberg Terminals
Time Deposit Investments
Overnight Deposit
Overnight placement with the Fed (RRP )
Overnight placement with our correspondents
A Time Deposit (TD) is a type of savings account that earns a fixed interest rate upon reaching maturity. Funds in a time deposit cannot be withdrawn during the term of the maturity ( These type of deals are done on the Reuters dealing system)
Kingdom of Belgium ECP
ISIN : International securities identification number
CUSIP : Committee on uniform securities identification procedures
Supranational Euro Commercial Papers
19,417
11,795
4,841
3,423
2,497 2,454 2,420 2,141 1,807 1,600 1,561 1,498 1,360 1,232 1,021 987 794 763
0
5,000
10,000
15,000
20,000
25,000
World Biggest Economies - USD Billion
IMF 2017 projection
Percentage of World GDP
Diversification
Holland
Sweden
Canada Austria
Belgium
Spain
Finland
Denmark
Australia
France
USA
Japan
Germany
Norway
United Kingdom
Switzerland Singapore
-0.75%
-0.50%
-0.40%
0.10%
0.20% 0.25%
0.50% 0.50%
0.90%
1.25%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
Lowest Central Bank Rates
5.25% 5.63%
6.25% 6.25% 6.50%
7.00% 7.00%
8.00%
9.00%
10.25%
12.50%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Iceland Indonesia India Colombia Vietnam Mexico South Africa Turkey Russia Brazil Ukraine
Highest Central Bank Rates
Lower credit rating , higher risk , higher return
Fixed Income Investments – USA
European Sovereign Securities
1. Gross domestic product (GDP) : it is the market value of all officially recognized
final goods and services produced within a country in a given period of time. (Released 30 days after the quarter ends)
2. US Initial Jobless Claims SA : Weekly initial jobless claims are the actual number of people who have filed for
unemployment benefits for the first time. (Released weekly)
3. Nonfarm payroll – Unemployment Indicator : A measure of the total number of persons employed in nonagricultural sectors
of the economy. (Released 1st Friday of the month)
4. Consumer Price Index – CPI – Inflation Indicator It is a price measures for tracking the price of a market basket of goods and
services purchased by individuals. The weights of the components are based on consumer spending patterns.
(Released 15 days after the end of the month)
Top Economic Indicators
5.Producer Price Index- PPI- Inflation Indicator
Measures prices received by producers at the first commercial sale.
(Released 17 days after the end of the month)
6. Industrial Production
Industrial production is the measure of physical output in factories, mines and utilities. Activity in manufacturing accounts for about 85% of total industrial production with the remainder of output from utilities and services.
(Released 16 days after the end of the month)
7. Retail sales
The report details the dollar value of purchases made at retail stores. (Example: Auto dealers, department stores, etc…)
(Released 14 days after the end of the month)
Top Economic Indicators
8. Trade Balance
Surplus and deficits in trade reflect the competitiveness of a nation’s economy, which in turn indicates demand for a country’s currency.
(Released 40 days after the end of month) 9. Purchasing Manager Index – PMI
Is an economic indicator derived from monthly surveys of private sector companies. An index reading of 50.0 means that the variable is unchanged, a number over 50.0 indicates an improvement while anything below 50.0 suggests a decline. The further away from 50.0 the index is, the stronger the change over the month. (Released first business day after the end of month)
10. Open Market Committee decision The Federal OMC is the Federal Reserve committee that makes key decisions
about interest rates and the growth of the United States money supply.
Top Economic Indicators
Economic Indicators - USA
Economic Indicators - Eurozone
World Interest Rate Probability
The Foreign Exchange Market
Forex or Foreign exchange is the simultaneous buying of one currency and the selling of another.
The Forex market has more buyers and sellers and daily volume than any other market in the world and takes place in major financial institution across the globe. According to the Bank of International Settlement, daily turnover in 2010 was about $4 Trillion.
In Forex, we have: Spot transactions Forward transactions FX SWAPs transactions Options transactions.
Forex Market and Locations
Frankfurt : Opens 09:00 AM Till 05:00 PM
London : Opens 10:00 AM Till 06:00 PM
New York : Opens 03:00 PM Till 11:00 PM
Sydney : Opens 01:00 AM Till 09:00 PM
Tokyo : Opens 02:00 AM Till 10:00 AM
Base Currency vs. Quoted or Variable Currency
The exchange rate is the price at which one unit of the base currency can be bought or sold, in terms of a number of units of the quoted currency.
Currencies are quoted in pairs. By convention the first
listed currency is known as the base currency and the second is called the quoted currency. X/Y X is the base currency Y is the quoted currency EUR/USD 1.0910 means that 1 Euro equals 1.0910 USD USD/JPY 120.08 means that 1 USD equals 120.08 JPY
Exceptions to The USD as The Base Currency
In most FX quotes, the USD is the base currency, with the other currency therefore assuming the status of the quoted currency. However there are exceptions to this Rule.
EUR/USD GBP/USD AUD/ USD NZD/USD EUR, GBP, AUD, NZD are base currencies when paired with the USD.
Cross currency pairs are pairs which do not involve the USD for example EUR/GBP EUR/JPY GBP/JPY EUR/CHF
EUR=Euro, GBP=Pound, CHF= Swiss Franc, JPY=Yen, AUD=Aussie $
Quoting Conventions
Like all financial products, Forex quotes include “Bid “and “Ask “ Bid : Offer to buy the base currency Ask : Offer to sell the base currency
Ask price is always higher than the Bid price The market maker buy the base currency at the Bid price and Sell it
at the Ask price. Buy it at the lower price and sell it at the higher price and lock in the spread as profit .
Traders buy the base currency at (the higher) Ask price and Sell it at
(the lower) Bid price. For example, EUR/USD may Bid at 1.0950 & Ask at 1.0953, this 3
pip spread defines the traders cost and the market maker profit.
Quoting Conventions
Currencies are quoted using five significant numbers, with the last placeholder called a point or a pip (price interest point)
The profit and loss generated from a 1 PIP change depends on the volume of the trade
For example a EUR/USD quotes 1.0910/1.0913
Dealer A bought 1,000,000 euro @1.0913 and sold it @ 1.0910 calculate the loss incurred.
Method 1 - (1,000,000/10,000)x( 1.0913-1.0910) = $100 x 3 pip = $ 300.
Method 2- Buy 1 Mio Euro at 1.0913 = 1,091,300 USD
Sell 1 Mio Euro at 1.0910 = 1,091,000 USD Loss = $ 1,091,300 - $ 1,091,000 = $ 300
What Happens When The Exchange Rate Moves?
The reason why it is important for you to understand which is the “Base Currency “ and which is the “ quoted currency “ ( variable) currency in any given pair, is that it allows you to see the relative value of one currency against another.
Moves up
The base currency is getting stronger against the quoted (variable) currency which is getting weaker.
Moves down
The base currency is getting weaker against the quoted (variable) currency, which is getting stronger.
GBP/USD
USD/JPY
EUR/USD: 1.0900/1.0904
Given a base currency amount ----- Multiply by the (BID) exchange rate to calculate the quoted currency equivalent.
1 million Euros is equivalent to €1,000,000x 1.0900 =
1,090,000 USD Given a quoted currency amount ---- divide by the
(ASK )exchange rate to calculate the base currency equivalent.
1 million USD is equivalent to USD 1,000,000/1.0904 =
Euro 917,094
EUR/USD
The World’s Biggest Rogue Traders in Recent History
Jerome Kerviel - Societe General Paris Loss $7.2 billion
In 2008, Societe General Paris "rogue trader" Kerviel lost the French bank approximately $7.2 billion through arbitrage of equity derivatives from unauthorized trades.
In October 2010, he was sentenced to 3 years in prison. He spent 5 years in prison & was released in sept 2014 with an electronic bracelet.
Kweku Adoboli UBS London Loss $ 2.3 billion
In September 2011, UBS revealed an unexpected $ 2.3 billion loss believed to be caused by a rogue trader in the banks London office. Kweku Adoboli, 31 yrs old.
Jailed in November 2012,
released in June 2015.
Shortly after the massive trading loss was discovered, the Swiss Bank’s CEO Oswald Grubel resigned from his post.
Nick Leeson - Barings Bank GBP 827 Million
Nick Leeson. He was employed by Barings Bank as a trader in the early 1990′s. As a trader he was responsible for bankrupting Barings Bank in 1995, a 233 year old bank , known as the Queen of England bank, with losses of $1.3 billion.
He was sentenced for 6.5 years in Singapore.
He now lives in Ireland and is a professional speaker.
Greatest Traders in the World
Richard J. Dennis, a commodities speculator once known as the "Prince of the Pit," was born in Chicago, in January, 1949. In the early 1970s, he borrowed $1,600 and reportedly made $200 million in about ten years.
Denis believed trading could be thought. To settle a debate on that point with William Eckhardt, a friend and fellow trader, Dennis recruited and trained 21 men and two women, in two groups, one from December 1983, and the other from December 1984. Dennis trained this group, known as Turtles, for only two weeks. He gave few of them accounts ranging from 250,000 to 2 Million USD.
When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million.
George Soros - Net worth $ 24 billion
George Soros born August 12, 1930, is a Hungarian-American investor, and philanthropist. He is the chairman of Soros Fund Management. He is known as "The Man Who Broke the Bank of England" because of his $1 billion in investment profits during the 1992 Black Wednesday UK currency crisis when Britain was kicked out of the ERM - Exchange Rate Mechanism.
Ranked by Forbes as the 7th richest man in America.
GBP/USD 1991 - 1995
The Richest People in Finance
Bloomberg Billionaires Index
The End
Sources:
Bloomberg
Reuters
World bank
Bank of International Settlement
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