| Restrictions to be placed on HRRs |
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| The Central Bank will shortly announce guidelines on the use of historical rate roll-over instruments, in order to reduce the risk associated with using this type of forward contract. |
A consultation process on the use of historical rate roll-overs (HRRs) between the Central Bank, the main banks operating in Ireland, and these banks’ business customers, is now drawing to a close, and according to the Central Bank, formal guidelines should be issued over the next couple of months.
HRRs are instruments used when hedging, and they came to prominence last year in the John Rusnak case at AIB’s US subsidiary, Allfirst. The aim of the Central Bank’s guidelines will be to limit the use of HRRs, as they are seen to be high-risk instruments. The guidelines will require financial institutions to put into place written risk management procedures about how the instruments are used within their institution, and the circumstances under which they can be used.
Customers of the banks will have to get written permission from their board of managment, to facilitate the use of HRRs. This is in addition to the current stringent documentation requirements for trading derivative instruments (eg forward contracts, options). Companies wishing to engage in treasury activities of this nature will have to file this extra documentation with their bank in advance of initiating any dealing. The new guidelines will limit the amount of times contracts can be rolled over to once, and this extension in the contract cannot go beyond three months. |
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| Article appeared in the October 2002 issue.
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