18. Hedging

Business entities who wish to hedge their import commitments must approach their Authorised Dealer in this regard.

Business entities may hedge their foreign exchange risk through an Authorised Dealer in a controlled manner through the active management of their currency exposures in the over the counter foreign exchange market.

Dealings in hedging instruments should not be undertaken for speculative purposes or as a means to circumvent the Regulations.

Business entities may not purchase spot foreign exchange to cover future commitments or accruals. As an exception, foreign currency may be purchased in the spot market for permissible transactions in respect of a firm and ascertainable underlying commitment, and may be credited to a CFC account if the funds are to be transferred abroad within a period of 30 days.

18.1 Active currency management for hedging contracts not exceeding 12 months

(a) Foreign currency may be sold to or bought from an Authorised Dealer by entering into either a forward contract or a foreign exchange option contract subject to the following conditions:

(aa) the instruments are required to cover a direct underlying foreign exchange exposure and to manage possible losses arising from adverse movements in foreign exchange rates from a transaction that is:

(i) permissible in terms of the Authorised Dealer Manual;

(ii) in respect of which a specific authority has been granted by the Financial Surveillance Department; or

(iii) in respect of a business entity actively managing foreign exchange risk exposure, inter alia, in respect of import payments, export proceeds, service type payments or receipts, tenders, acquisitions, balance-sheet risk and loans.

(bb) cover may not be granted for a period extending beyond 12 months, while contracts may, however, be entered into and exited at the business entities’ discretion and need not run until the commitment or accrual has been met;

(cc) the same underlying commitment or accrual is not simultaneously covered forward;

(dd) in respect of all commitments or accruals, documentary evidence is provided to the Authorised Dealer at the time of ‘pay away’ confirming either the nature and extent of the commitment, or that foreign currency is definitely accruing and the nature and extent of such accruals; and

(ee) all settlements in terms of forward cover taken out which does not result in the physical conversion of currency to and from Rand, i.e. the so-called ‘in-between trades’ must take place in Rand.

(b) Institutional investors should note that any open hedging position held is regarded as foreign exposure and must accordingly be marked off against their respective foreign portfolio investment allowances as well as being accounted for in the quarterly asset allocation reports.

(c) In respect of cover granted to local stockbrokers for foreign exchange transactions with non-residents on the South African exchange, the period of such cover may not exceed 45 days from the date of the transaction as evidenced by brokers’ notes.

18.2 Hedging contracts exceeding periods longer than 12 months

Foreign currency may be sold to or bought from an Authorised Dealer by entering into either a forward contract or a foreign exchange option contract, subject to the following conditions:

(a) the instruments are required to cover a firm and ascertained foreign exchange commitment due to a non-resident or a foreign exchange accrual due from and payable by a non-resident arising from a transaction either:

(aa) permissible in terms of the Authorised Dealer Manual; or

(bb) in respect of which a specific authority has been granted by the Financial Surveillance Department;

(b) cover may not be granted for a period extending beyond the due date of the underlying commitment or accrual, while contracts may be entered into at any time after the commencement of the commitment or accrual for the full amount or part thereof and need not run until the commitment or accrual has been met;

(d) prescribed import documentation is viewed or, when import documents are not available, a letter from the business entity signed by two responsible persons whose names and titles should appear below their signatures giving full details of the underlying commitment;

(e) in respect of the accrual of the proceeds of exports, the period of cover granted may not extend beyond six months from the date of shipment, except where the Authorised Dealer concerned or the Financial Surveillance Department has granted permission for such proceeds to be received after six months. In addition, cover may also be granted in respect of any pre-shipment period;

(f) where a dispensation has been granted by the Financial Surveillance Department to certain corporates to be exempted from the requirement to submit documentary evidence for trade related foreign exchange transactions (the imports undertaking dispensation), such dispensation also applies when concluding forward or foreign exchange option contracts in respect of those transactions;

(g) in respect of all other commitments or accruals, documentary evidence is provided confirming either the nature and extent of that commitment, or that foreign currency is definitely accruing and the nature and extent of such accruals;

(h) where the required documentary evidence is not available at the time of establishment of a forward or foreign exchange option contract, such documentation must be presented within 14 days;

(i) for all documentation submitted in evidence of the foreign exchange commitment or accrual, in respect of which cover is availed of, the contract number and the period of the contract must be indicated; and business entities may cover forward up to 75 per cent of budgeted import commitments or export accruals in respect of the following financial year. Such requests must be referred to an Authorised Dealer who will furnish the business entity with more details regarding the terms and conditions applicable in this regard.

18.3 Interest rate risk and price risk

Business entities may approach their Authorised Dealer to arrange cover in respect of interest rate risk and price risk on commodities and metals.

Business entities who wish to hedge directly with an offshore counterparty require prior written approval of the Financial Surveillance Department.