ISLAMI BANK BANGLADESH LTD

INTERNATIONAL BANKING WING

FOREX TREASURY DIVISION
HEAD OFFICE, DHAKA

E.C MEMO: Date:

March 16, 2009

Re: Proposal for approval of market risk and counterparty investment (credit) risk
related limits for real time management of Bank’s funds in the financial
markets.

The functions of the Dealing Room are directly related to Local & Global Financial Market. So,
the risk of the Dealing Room originates from the activities for performing transactions/deals
on behalf of the clients (merchant trading-Export, import & remittances), currency trading,
risk of our own Nostro balances & balance sheet operation and counterparty default risk and
to ensure profitability managing risk in the financial markets operation. Due to ongoing
global economic recession/crises, the Financial Market is very much volatile. Considering
organizational size, needs, the higher Market & credit risk appetite in the financial market,
we have rationalized the market risk & credit risk related limit to avoid any unexpected
losses/situations from Foreign exchange dealing operations.

1. Market Risk management: Market risk, in simplest terms, is price risk or exposure to
adverse price change against the positions/buys or sell of foreign currency to /from
customers or other banks by dealers which may seriously implication for the cash follow of
the Bank.. To limit the unlimited market risk against adverse currency position, the dealing
room is allowed the following limits considering the proper allocation of a portion of equity of
the Bank. The Bank is establishing a Daylight limit, Stop loss limits, Overnight limits, and
VAR limits and MAT that each trader or group can carry on a particular day.

A. Daylight/Intraday Limits: The Daylight limit is allowed for maximum open position
that can be taken during the course of the trading session by dealers/group.
In million USD
Sl Name of limit Dealing Chief Dealers
room Dealer
01 Overall Daylight limit per Day USD 30 USD 15.00 USD 10
. (Including FC/BDT)
02 Daylight limit ( Excluding FC/BDT) USD 10 USD 5.00 USD3.00
. per day
03 Deal Size (including FC/BDT) -- USD6.00 USD 4.00
.
04 Deal size (Excluding FC/FC) -- USD 2.00 USD 1.20
.
Strategy for Daylight limit:
• The Daylight limits applied subtracts the initial allocation of each position and then
makes adjustments when the position is closed out.
• The daylight limit allows considered to be as the core

• 10% risk amount to be kept per deal as risk amount on daylight limit and subsequent risk
amount to be calculated on the residual balances of daylight limit.
• Daily volatility should be calculated on each day before entering into trade.
• After the trading session stipulated in the Treasury Manual, all outstanding deals shall
have to be within the overnight limit fixed by the management.

B. After Hour Dealing Limit & Off premises Dealing: When as usual trading session
upto 5. PM is ends, after hour dealing is calculated. Due to different time zone, Dealers are
to do deal with exchange houses/Banks and squiring up the outstanding deals after the
trading session. As such, to facilitate the merchant trading especially remittances from
UK,USA,Canada etc,Dealing Room is allowed following after hour Dealing limits for the
Dealing Room only.
Sl Name of limit Dealing Chief Dealers
room Dealer
01 After hour/off premises limit USD .50 USD .20 USD .10
.

Strategy for after hour/off premises limits management:

• All deals done with exchange houses/ Banks have to be covered from highrt volatile
currency to mostly stable currency instantly to avoid risk and position Management.
• All Off premises dealing alloed only for cover for exchange houses/Bank subject to
instant converted /hedge to stable currency
• All Off premises/Ater hour deals have to be market at Deal slip with RED INK.
• Fresh Currency Dealing not allowed & All Outstanding Currency dealing may be
squired with due record.

B. Overnight Limit: At the end of each day’s trading session/intraday/daylight, all

outstanding deal has to be under the overnight limit including the assets/liabilities created at
branch -end/pipe line transactions as allowed below:
Sl Name of limit Dealing Chief Dealers
 room Dealer
01 Overall Overnight limit USD 8.00 USD 3.00 USD 1.00
.
02 Overnight limit ( Excluding USD 2.00 USD 1.00 USD 0.20
. USD/BDT)

Risk Management strategy for Overnight limit:

• Currency Wise Overnight limit have to be spited among different currency pair by
authority.
• Overnight Position is to be kept considering the Volatility (Price Movement) of the
currencies to minimize the risk of significant the loss.
• The dealers shall have to ensure to keep the overall limit within the open position limit of
the Bank.
• All pipe line transactions/transit are to be carefully handled to keep the Dealing room
limit also within the BB prescribed limits.

• C. Value at Risk Limit (VAR):

Only daylight limit alone are not enough. A big open position in a volatile currency
represents a much bigger risk relative to profit on a exposure in a relatively stable currency.
The VAR uses on overall Portfolio of the Bank’s Exchange position/assets-liabilitiesAs such
Bank dealing in foreign currency put limits, not only on the overall volume of the foreign
exchange Position but also on the potential losses over night, which may estimate through
VAR.
Sl Name of limit Dealing room
01. Overall Value at Risk Limit BDT 4.00 million
02. Value at Risk for Currency Trading BDT 1.00 million

Risk Management strategy for VAR limit:

• Since the VAR measures the Possible, The Back office should be calculated Back
testing to Compare Actual overnight happening with that of VAR and report to the
Management
• It represents the Overall Marl to Market loss on the portfolio on particular day which
should not exceeds beyond the VAR limit fixed above.
D. Stop loss limit: Bank can not afford unlimited losses against Fx deals on a particular
day or each position. To limit the risk of loss, Bank allows applying cut loss limit against
position on each day or deal.
Sl Name of limit Dealing Chief Dealers
room Dealer
01. Stop loss limit per day USD 30000 USD USD
15000.00 10000.00
02. Stop loss limit per Deal -- USD USD
1500.00 1000.00
 04. Management action trigger

Risk Management strategy for Stop Loss limit:

• The stop loss limit for Dealing room, Chief Dealer & Dealers should not be exceed
beyond 1% of the Risk amount of the Daylight limits.
• Dealing shall have to set up Risk reward ratio at 2:1 for each position to keep the per
deal stop loss limits within the limits.

D. Management Action Trigger: The management action trigger is a trigger level to warn
of a persistently loss making position or abnormal profit making positions. It is calculated on
rolling monthly profit for 21 business days.
Sl Name of limit Management
03. Overall Management action trigger (Loss Average profit of latest 21
trigger) days revenue
05. Management action trigger for Currency trading Do
(Loss Trigger)
06. Management action trigger for Currency trading Abnormal profit on a
(profit trigger) particular day above average

• When a MAT (Loss) is exceeded, trading management must review the current position
and decided whether it should be maintained, reduced or closed out.

• Any unexpexted/abnormanl profit have to be informed to the Management instantly with

due explanation.

2. Counterparty Credit Risk Management:

• Credit risk involves inability or unwillingness of a customers or Counterparty to

meet commitments in relation to funding/lending/investments, currency
trading, hedging, settlements and other financial transactions. It may be done
for External & Internal factors.

• Credit risk ,inherent, in all banking activities, arises from the possibility that
the counterparty to a FX dealings can not/will not make the agreed payments
of value date/maturity date against FX deals confirmations.

• When an institutions provide credit whenever took, it expect to be

repaid.However, It may arises when clients/Banks Counterparty becomes
insolvent or FX or other control imposed by Government authority.Sovernity
risk to minimize the funding risk. /arises for default of other
Banks/counterparties for unable to perform its obligations. i.e. default or
dispute risk.
 • The counterparty creditworthiness & adjusted to change in the financial
circumstances in the Financial Marker by the Bank. The Credit risk may be
settlement or pre-settlement risk.

AS such To minimized the Credit Risk,it is Categorized as Category A limit & Category –
b limit to avoid any unexpected situations in the ongoing financial crises and real time
management & follow up on Fund.

2. a Category –a limit : Category –A limit are allows are those counterparties with
whom we have deposit/investment in foreign currencies and any unexpected situation in
the financial market may expose the bank at high risk of loss. As such it has been bought
under Category –A limit. (ANNEXURE-1)

2. B Category –B limit: Category –B: The limit allows to those with have we have
Foreign exchange dealing with counter values i.e every deal is covered by counter-value.
As such only settlement risk are involved. However, If any Currency deals can not/is not
settle at value date with the Counterparty, against which we have already delivered deal
proceeds, the part of the transaction will be under Category –A limit until its settlements.
(ANNEXURE-2)

• Total settlement Limit: allowed for settlement /value date baiss and takes
exposures upto the allowed limit at any trade date for different settlement date.
• Transaction exposure limit: Such limits are allowed for low grading Banks and
trade date bassi.Untill settlement of the deal at value today or Tom or Spot, further
deals/exposures can not be taken.

3.00 Limits for Dealing with Corporate

Sl Category of Corporate Limits

01. In-house Corporate As per limit allowed by IBW,PRD,GID as
Investment limit (Mode wise) except the
cash retirements.
02. Inter-Bank Corporate (Through AS per Category –B limit fixed for Banks)
Bang)
03. Direct dealing with Corporate AS per CRG & Previous Business Track
record

4.0 Money Market Dealing : Due to limited scope and few number of products ,Islamic
Bank is now dealing with money the following two way
 • Foreign Currency Money Market Dealings

1. Placement/Nostro funding
2. Investment with Islamic Development Bank(IDB)/Bahrain Islamic Bank etc

• Local Currency Money Market Dealings for Banks & NON Bank FIS :

1. Placement to Mudabarah saving A/C with Other Islamic bank/Windows

2. Mudarabaha Term Deposit with Other Islamic Bank/windows
3. Bangladesh Govt.Islamic Investment Bonds.

Limits for the Foreign Currency & Local Currency Money Market dealing for Banks & Non
Bank Financial shall be determined on case to case basis after receiving proposal from
counterpart and appropriate credit rating as per CRG and financial highlight of the
concerned Banks or NBFIs.

In view of the above, we feel that the rationalization of limits may help to capital charge
against Market Risk & credit Risk as per Basel-2 and arrange overall control of Banks Foreign
Exchange Portfolio of the Bank.

The issue is now placed before the Executive Committee for their kind perusal and approval.
If agreed, the following resolution may be adopted:
“Resolved that the proposal for fixing of different foreign Marker risks & Counterparty credit
risk related limits as envisaged in the memo is perused and hereby approved for 01(One)
year from the date hereof on revolving basis with advise to ensure real time management of
funds.

(Md.Fariduddin Ahmed)
Managing Director

ANNEXURE 1

In million (Currency Wise)

Sl
Name of the Bank City Country Currency Lim
01. Newyor USA
Standard Chartered Bank k USD
02.
CitiBank NA, NY, USA USD
04.
Mashreq Bank, NY, USA USD
05.
HSBC Bank, NY, USA USD
06.
Commerz Bank, AG, Germany USD
07.
Korea Exchange Bank,Seoul, Korea USD
08.
Habib American Bank, NY, USA USD
09.
Sonali Bank,UK, London USD
10.
JP Morgan Chase Bank, NY, USA USD
11.
Habib Bank, Zuich USD
12.
Wachovia Bank,NA, NY, USA USD
13.
UBAF Bank Hongkong USD
14.
ICICI Bank, Hongkong USD
15.
United Overseas Bank, Singapore USD
16.
SCB/AEBL,Kalkata ACUD
17.
Sonali Bank, Kolkata, India ACUD
18.
Arif Habib Rupali Bank,Karachi, Pak. ACUD
19.
Peoples Bank, Colombo, Srilanka ACUD
20.
A.B Bank, Mumbai, India ACUD
21.
State Bank of India, Kolkata, India ACUD
22.
Nepal Bangladesh Bank, Nepal ACUD
23. Standard Chartered Bank, India ACUD

Sl Name of the Bank City Country Currency Lim

24. Standard Chartered Bank,
Karachi,Pak. ACUD
25.
Bank of Bhutan, Bhutan ACUD
26.
Bank Saderat, Iran ACUD
27.
CitiBank NA, Mumbai,India ACUD
28.
ICICI Bank, Mumbai, India ACUD
29.
Mashreq Bank, Mumbai, India ACUD
30.
HSBC Bank, Mumbai,India ACUD
31.
HSBC Bank, Karachi, Pakistan ACUD
32.
Bank of Novosktia, Canada CAD
33.
United Overseas Bank, Singapore SD
34.
Lloyds TSB Bank, UK, London GBP
35.
JP Morgan Chase Bank, London GBP
36.
Habib Bank Zurich AG London GBP
37.
Sonali Bank,UK, London GBP
38.
Commerz Bank AG, Germany EURO
39.
CitiBank Ag, Germany EURO
 40.
Unicredito Italiano, Italy EURO
41. American Express Bank, AG,
Germany EURO
42.
Banco Popolare De, Verona, Italy EURO
43.
Sonali Bank,UK, London EURO
44.
Dresdner Bank AG FF EURO
45.
Al Raji Banking Inv.Corp., K.S.A SAR
46. Bank of Tokyo Mitsubishi, Tokyo,
Japan JPY
47.
Zurcher Kantonal Bank, Switzerland CHF

ANNEXURE-2

In million USD
SL Bank Location TSL(Total settlement To
limit)
City Country

A.. Bangladesh Bank Dhaka Bangladesh 20.00

B. Foreign Banks
01 CitiBank Na Dhaka Bangladesh 10.00
.
02 HSBC Bank Dhaka Bangladesh 8.00
.
03 Standard Chartered Dhaka Bangladesh 10.00
. bank
04 Commercial Bank of Dhaka Bangladesh 3.00
. celyon
05 Bank AL Falah Dhaka Bangladesh 2.00
.
06 Habib Bank,Pakistan Dhaka Bangladesh
.
07 National Bank of Dhaka Bangladesh
. Pakistan
08 State Bank of India Dhaka Bangladesh 2.00
.
C. State owned Bank
01 Sonali Bank Dhaka Bangladesh 10.00
.
02 Agrani Bank Dhaka Bangladesh 8.00
.
03 Janata Bank Dhaka Bangladesh 8.00
.
04 Rupali Bank Dhaka Bangladesh 2.00
.
D. Specialized banks
01 Krishi Bank Dhaka Bangladesh 3.00
.
02 Shilpa Bank Dhaka Bangladesh 2.00
.
03 BASIC 3.00
.

SL Bank Location TSL(Total settlement To

limit)
City Country

Islamic Bank

01 Al Arafa Dhaka Bangladesh 3.00

02 ICB Islamic Bank Dhaka Bangladesh
.
03 Shajalal Dhaka Bangladesh 2.00
.
04 Social Dhaka Bangladesh 2.00
.
05 First Security Dhaka Bangladesh
.
06 EXIM Dhaka Bangladesh 4.00
.
C. Private Commercial Bank
01 AB Bank Dhaka Bangladesh 5.00
.
02 Bank Asia Dhaka Bangladesh 4.00
.
03 BRAC Dhaka Bangladesh 2.00
.
04 Dhaka Bank Dhaka Bangladesh 4.00
.
05 Dutch Bangla Dhaka Bangladesh 2.00
.
06 Eastern Bank Dhaka Bangladesh 3.00
.
07 IFIC Dhaka Bangladesh 2.00
.
08 Jamuna Dhaka Bangladesh 2.00
.
09 Mercantile Dhaka Bangladesh 3.00
.
10 Mututual Trust Dhaka Bangladesh 2.00
.
11 NBL Dhaka Bangladesh 3.00
.
12 NCC Dhaka Bangladesh 3.00
.
13 One Dhaka Bangladesh 1.00
.
14 Prime Bank Dhaka Bangladesh 5.00
.
15 Premier Bank Dhaka Bangladesh 2.00
.

SL Bank Location TSL(Total settlement To

limit)
City Country

16 Pubali Bank Dhaka Bangladesh 3.00

.
17 Southeast Bank Dhaka Bangladesh 4.00
.
18 Standard Bank Dhaka Bangladesh 2.00
.
19 The City Bank Dhaka Bangladesh 3.00
.
20 Trust Bank Dhaka Bangladesh 2.00
.
21 UCBL Dhaka Bangladesh 2.00
22 Uttara Bank Dhaka Bangladesh 2.50
.
23 Bangladesh Commerce Dhaka Bangladesh --
. Bank
Overseas Bank/Branch
01 Commerz Bank Frankfurt Germany 10.00
.
02 Mashreq Bank Dubai UAE 5.00
.
03 The Bank of Nova Hongkong Hongkong 5.00
. scotia
04 ICICI India India 3.00
.
05 CitiBank Na Singapore Singapore 5.00
.