17. Foreign Exchange

17.1 Foreign Exchange Risk Management Policy

Introduction

The "Australian Government Foreign Exchange Risk Management Guidelines" details the policy framework for managing foreign exchange (forex) risks.

Under the policy guidelines, the department is responsible for managing its forex exposures within the government's general policy of self-insurance.

The department is eligible for supplementation for forex losses by way of departmental appropriations, subject to the department's forex risk management practices being consistent with Finance's guidelines. The department must:

Prepaying foreign exchange obligations for the purpose of reducing forex risk is known as ‘hedging’ under the guidelines.

This chapter provides instructions and guidelines to departmental officers to manage forex exposures consistent with Finance's guidelines and other departmental policy documents.

DFAT Forex Exposures

The following forex exposures affect the department:

Estimating and Reporting Exposures

Instruction

Estimating departmental exposures
  1. The department estimates forex exposures using:
    • Historical data, adjusted for material changes in the current year budget, for departmental transactions. Historical data is preferred to current year budget allocations because overseas departmental expenditure is primarily operational and stable over time; and posts budgets are allocated in AUD and can be spent in a variety of currencies.
    • The current year's schedule of administered payments to international organisations.
    • Current year budget estimate, including the forex exposure associated with any overseas projects, for overseas property transactions.
Reporting exposures to Finance
  1. The department must provide financial reports to Finance to substantiate the department's forex exposure and the amount sought for supplementation or to be returned to the Budget.
  2. The frequency and format of these reports are subject to negotiation with Finance.
  3. The CFO must sign-off all reports and certify that the department's forex risk management policies are in accordance with government policy.

Procedure

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Embedded Structures

Instruction

  1. An embedded structure is a clause within an AUD value contract where exchange rate movements can trigger a change in the AUD value of the contract. The Finance guidelines define "hedging" to include embedded structures in contracts to mitigate forex risks.
  2. Under the guidelines contracts / arrangements are not considered hedging if they are Standard Industry Practice (SIP) and:
    • The transaction would be entered into by other entities in the industry;
    • The transaction is not used to simply reduce forex risk; and
    • It is impractical or not value for money to enter into an arrangement different to SIP.
  3. The department must exclude embedded structures from contract specifications. Examples of embedded structures, include:
    • Floor: guarantees the supplier (or the purchaser) a minimum exchange rate therefore protecting them from decreases in an exchange rate;
    • Embedded cap: guarantees the purchaser (or the supplier) a maximum exchange rate therefore protecting them from increases in an exchange rate;
    • Demand triggered contract: alters the exchange rate mechanism should there be a change in the underlying demand for the service or product;
    • Stop-loss clause: similar to a cap or floor where a predetermined exchange rate, when triggered, will alter the terms of the contract;
    • Rise and fall clause: uses changes in the exchange rate to alter the delivery price of goods or services. This clause may relate to the direct currency exposure or to a third currency exposure relating to input costs for the supplier. This clause may also include a multiplier effect on the exchange rate or have a non-linear impact upon the underlying currency exposure; and
    • Rise and fall clauses may also use an average rate methodology for calculating the exchange rate which
  4. If any proposed contract or agreement is considered to reduce or eliminate forex risk through embedded structures, and is considered to be best value for money or is necessary in circumstances of a sole supplier, an exemption must be sought from the Finance Minister.
  5. The department cannot hedge externally through embedded structures unless approval is received from the Finance Minister.

Procedure

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Alternative Currency Pricing Options

Instruction

  1. Often for the department there is no alternative currency pricing options. However, where pricing is available in alternative currencies, approvers must consider, in the value for money procurement analysis, which currency achieves the best AUD outcome. Where a value for money analysis is not affected by alternative pricing options, the approver must select the currency which gives the best AUD outcome.
  2. Approvers must also maintain adequate details in the procurement documentation (eg AUD cost comparison of the options) to justify their decision.

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17.2 Managing Exposures at Post - Bank Account

Instruction

  1. The department must not invest foreign currency nor maintain foreign bank accounts for the purpose of replicating forward currency transactions. Investing in forex or maintaining a bank balance in forex for the purpose of making specific payment(s) well into the future locks in the AUD exchange rate. This is defined under Finance's guidelines as a hedge, which is prohibited.
  2. This prohibition does not include the overnight investment of surplus funds by a post's financial institution as part of their normal cash management.
  3. Surplus funds held in overseas bank accounts represent an unnecessary forex exposure. While surplus foreign currency is not the department's most significant forex exposure, it is the forex risk most able to be effectively managed by the department.
  4. Post must minimise overseas cash balances held, through accurately forecasting their weekly cash requirements. Surplus funds should be reported to the Director, FPT.

Procedure

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17.3 Attached Agency Operations at Post

Instruction

  1. The department provides foreign currency payment and receipt services to other agencies. The department settles with agencies in AUD, therefore the collection or payment of foreign currencies on behalf of other agencies can create forex risks for the department.
  2. Under the government policy agencies are responsible for managing their own forex exposures and the department must ensure it is not exposed to other agencies' forex risks.
  3. The department eliminates this risk by offering agencies a current market exchange rate, based on the department's most recent currency purchase, to convert all forex transactions to AUD for settlement. Posts which update the Spot exchange rate in SAP manually, must ensure the rate is current as this mitigates the department’s forex risk. (Refer SAP Helpcard ZEXR - TY Update Weekly Soft Currency Exchange Rate)
  4. Posts that receive revenue from other agencies that will not be consumed by the post in the next week must seek advice from the Director FPT (see FMM Chapter 17.2).

Procedure

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17.4 Alternative Forex Counterparties

Instruction

  1. The department must buy and sell foreign currency through the Reserve Bank of Australia (RBA).
  2. In cases where the RBA cannot source the required currencies to meet the department's needs, the CFO may authorise use of another "counter party" (institution selling foreign exchange).
  3. Where other forex selling institutions are used, the CFO or Overseas Finance Manager the institution in writing of the personnel who are:
    • Approved dealers (purchasers) of forex;
    • Approved confirmation signatories; and
    • Approved bank transaction signatories (if required).
  4. Officials must ensure counterparties acknowledge the receipt of the written authority as detailed above, prior to the commencement of transactions. Approved counterparties must be advised immediately in writing of any changes to authorities.

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17.5 Management of Foreign Currencies and Conversions

This section should be read in conjunction with Administrative Circular P0561 Diplomatic and Consular Privileges.

This section addresses circumstances where:

Currencies are frequently referred to in terms of "hard" or "soft". These terms are defined as follows:

Of the countries that have a soft currency, restrictions are often imposed such as not being able to convert to a hard currency by commercial means or only allowed to convert to a hard currency in special circumstances (eg on production of evidence that the currency has been obtained by previous importation or conversion of a hard currency).

There are situations in which a currency can have some characteristics of both a hard and soft currency. For example, posts may maintain a local currency account which can be exchanged for hard currency such as US dollars but yet the same local currency taken in receipts at the mission may be non-convertible due to local exchange control legislation (ie soft currency).

Compliance with local laws

Instruction

  1. Heads of Mission should ensure that all officers (including attached agencies) comply with the laws and regulations of the host Government, including those which cover foreign currency exchange control. The HOM and Finance Manager should be satisfied that official exchange rates are being used at all times. Posts responsible for ensuring the official rate of exchange as loaded in SAP is used for all transactions. Under no circumstances should a non official exchange rate be used without prior consultation with the CFO, Canberra.
  2. Failure to comply with host government laws and regulations may result in suggestion that officers have engaged or are engaging in practices which are in violation of host Government law and Australian Government policy. Heads of Mission must satisfy themselves that officers fully understand that a breach of these instructions is contrary to the Overseas Service Code of Conduct and may lead to disciplinary action.

Procedure

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Use of Exchange Rates

Instruction

  1. The Budget Exchange Rate (BER) is used to:
    • Calculate the budget adjustment for realised foreign exchange gains or losses under the "no win, no loss" arrangement. The BER must not be used to calculate officer entitlements (eg salary, travel allowance, HMA, etc).
    • Allocate budgets to work areas.
    • Convert AUD amounts specified in financial delegations and Finance Manager appointments to foreign currency. Note: the CFO may specify an alternate exchange rate when there are extreme movements in the exchange rate.
  2. The SAP Spot exchange rate is updated on a daily / weekly basis must be used to convert:
    • Foreign currency transactions to AUD for the external financial reporting purposes.
    • Foreign currency transactions to AUD to determine the procurement method.
    • An amount (including AUD amounts) to another currency for payment or receipt. The weekly Spot exchange rates published on the CID are used to convert employee entitlements (eg A-based salaries that are provided to posts in AUD).

Reimbursement to Officers of the Cost of Supplies or Services Purchased for Post

Instruction

  1. In normal circumstances payment for all goods and services shall be made direct to the supplier by the post from its official bank account. It is against departmental guidelines for officers to use personal funds for purchases except in unavoidable circumstances. On the occasions when officers seek reimbursement these payments should be made from petty cash or cashier's advances and approved by the Finance Manager.
  2. Should an officer require reimbursement of in country expenditure, as a general rule, the reimbursement will be in the currency of the original transaction. Where the transaction was undertaken in the non-convertible local currency the reimbursement wherever possible will be made in that same currency. If the officer is able to produce evidence of commercial exchange at the official exchange rate reimbursement can be made in the local convertible currency.
  3. Should a requirement arise for an officer to undertake official purchasing in another currency which the post does not officially hold, an advance should be raised. The advance should be given in the most appropriate currency held by post. The amount given should be calculated by using the official exchange rate in SAP which converts the required foreign amount into the equivalent post currency amount.
  4. Acquittal of all advances must be made in the currency of the advance and the officer will be required to produce evidence of currency exchange transactions as part of the advance acquittal.
  5. The department would not be able to manage its forex risk (as required by Finance's guidelines) appropriately with currency conversions and alternate choices of currency reimbursement occurring on an ad-hoc basis. Where hard currency expenditure is to be reimbursed it must take place in the hard currency of the original transaction, unless prior approval is gained from the CFO.

Procedure

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Travel Allowance

Instruction

  1. Travelling allowance for officers must be advanced in the official convertible currency held by post. The amount advanced is calculated using the converted amount of the currency specified in the Overseas Travel Allowance Rates schedule. Calculation of the advance must be undertaken using the current rates in SAP.
  2. Acquittal of travel advances is to be made in the currency of the advance and must include evidence of any commercial exchange. For example, a post maintains a soft currency account and a USD account. An officer is travelling to Canada for one day. The overseas rates schedule denotes the allowance in CAD. The amount in CAD payable to the officer travelling must be converted by Post using the current SAP Spot exchange rate convertible currency held (in this case USD). Post then pays the officer travelling the USD amount.

Procedure

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Officer Contributions for Official Expenditure

Instruction

  1. Where an official is required to make a contribution towards official expenditure, the payment to the post should be made in the currency of expenditure.

Application for Alternate Currency Reimbursement

Instruction

  1. Where extraordinary conditions exist to suggest that an alternative currency of reimbursement is desirable, the post may request a determination from the CFO on the matter. Post should forward a request by cable to the CFO advising of the:
    • Nature of reimbursements or payments to be made to the officer;
    • Source of any soft currency used;
    • Amount of reimbursement in the original currency of transaction;
    • Amount of reimbursement in the requested alternate currency; and
    • Official purchase rate available to post for the requested alternate currency.
  2. Any official seeking a determination from the CFO for an alternate hard currency reimbursement in exchange for soft currency expenditure, must produce original documentary evidence that the soft currency was obtained through a normal legal commercial transaction. Further, to have a reimbursement made in a hard currency other than the transaction currency, the officer must show that the department will not suffer any financial loss in AUD terms.

Procedure

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Payment of LES salaries

Instruction

  1. The Finance Manager must ensure that, except for the following circumstances, LES salaries must be paid in country in local currency (ie the host country’s legal tender):
    • Where the post does not maintain a local currency bank account the CFO may approve an payment alternate currency.
    • Where local law prevents an LES from opening a local currency bank account the CFO may approve an alternate payment currency.
    • In the event of local civil unrest, disaster and/or emergencies the AS RPB (in consultation with the CFO) may approve an alternate payment currency.
    • In other compelling circumstances approved on a case-by-case basis by AS RPB (in consultation with the CFO) may approve an alternate payment currency.
  2. LES salaries must be paid by direct credit (where available) to the employee’s bank account.
  3. To avoid confusion the payment currency and mode of payment should be specified in the official’s contract or letter of engagement.

17.6 Forex Controls and Records

Instructions

  1. The department's foreign currency transactions are recorded in SAP. Internal controls are maintained via adequate separation of duties supported by secure SAP and ReserveLink access restrictions.
  2. To facilitate compliance with accounting standards and the Finance’s forex guidelines all forex transactions must be recorded in SAP with the following details:
    • amount in foreign exchange;
    • currency paid;
    • AUD equivalent amount at the Spot and Budget Exchange Rates;
    • payment date;
    • Forex actual rate;
    • deal date (date of purchase of forex);
    • cost of the transaction (if any);
    • current spot rate (if different to rate at which the transaction is dealt);
    • person dealing the transaction;
    • person authorising the transactions; and
    • counterparty and counterparty payment details, if other than the RBA.

Procedure

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17.7 Transfer of Private Funds

In special circumstances the CFO may approve the transfer of a departmental official’s private funds using the Other Trust Moneys (OTM) account. The CFO considers each application on its merits, however, the use of OTM is generally restricted to cases where local banking laws prevent an official transferring funds through normal banking channels.

The use of OTM is only available to DFAT officials because the DFAT CEIs do not apply to officials from other agencies.

This section should be read in conjunction with Administrative Circular P0488 Diplomatic and Consular Privileges, with particular regard to the purchase of motor vehicles and currency purchases.

Instruction

  1. The Finance Manager must ensure that officials arriving at the post are properly briefed on the policy and procedures as well as the implications of the currency exchange laws and regulations of the host country.
  2. The transfer facility is provided as a last resort for departmental officials. Officials must demonstrate they have taken all reasonable and legal steps to avoid use of the official bank account, including:
    • Selling goods for hard currency and / or negotiating payment to their off shore bank account where it does not contravene local laws.
    • Disposing of most personal effects in a sufficient time frame.
    • Managing personal entitlements that are paid at post near the end of their posting to ensure surplus funds are not accumulated.

Source of funds

  1. Funds from the following sources can be transferred:
    • Proceeds from the sale of a motor vehicle.
    • Proceeds from the sale of surplus household effects bought for personal use and not for the sole purpose of resale.
    • Unexpected payments (eg insurance claims, etc) received immediately prior to or after the end of the official’s posting.
    • Excess personal entitlements (eg salary, allotment, etc) paid at post.

Ownership criteria

  1. The motor vehicle or household effects must be owned by the official, the official’s spouse or other family member recognised by the department.
  2. One motor vehicle for an unaccompanied employee or two vehicles per family unit per posting are eligible for transfer (unless specific special circumstances justify more).
  3. Unless the CFO determines otherwise a vehicle or household effects must have been owned by the official (or dependent) for at least 1 year of a 2 year posting or 2 years of a 3 year posting prior to sale.

Information required by the CFO

  1. The Finance Manager must submit the application to the CFO by cable and provide the information specified in “Request to transfer private funds” below.

Transfer amount

  1. The Australian dollar amount that can be transferred from the sale of a vehicle or household effects is the lower of the following values:
    • Purchase price (ie invoice price) plus costs necessarily incurred in taking delivery converted to AUD at the SAP spot exchange rate that applied on the transaction date(s).
    • Sale price minus any selling costs incurred converted to AUD at the SAP spot exchange rate that applied on the transaction date(s).
  2. The CFO must specify the amount to be transferred relating to the sale of a vehicle or household effects AUD.

Receipt of money

  1. The Cashier must not be receipt money until the CFO’s written approval has been provided.
  2. Where the CFO has specified an AUD transfer amount the Cashier must calculate the maximum foreign currency amount for deposit using the Spot exchange rate prevailing on the date of the CFO’s approval.

Approval of payment

  1. Before approving the spending proposal the Approver must ensure:
    • The transfer amount was in accordance with the CFO’s approval and was recorded in SAP at the correct exchange rate.
    • The AUD amount to be paid is equal to the AUD amount credited to the special account.

Request to transfer private funds

A requests to transfer private funds should be sent to the Chief Finance Officer by cable and include the following information.

Transfer amount

Source of funds

Sale of motor vehicle
Sale of other goods
Other sources

Head of Mission certificate

The request should confirm that the HOM is satisfied:

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