1.1 Scope and Authority
1.1.1 This document sets out the guidelines (the “Guidelines”) governing the asset and
liability management activities of the African Development Bank (the “Bank” or the
“ADB”) and the Nigeria Trust Fund (the “NTF”)1. It is intended to serve as a
reference tool for all Staff involved in the Bank’s asset and liability management
activities. For the purpose of the Guidelines, asset and liability management activities
include all debt funding transactions, investment of liquid resources, managing the
currency exposure of the administrative budget and the non-credit and operational
aspects of the Bank’s lending and equity investment operations. Separate guidelines
prescribe the rules governing the management of credit and operational risk for the
Bank’s sovereign and non-sovereign loan and equity investment portfolios2.
1.1.2 On April 14, 1998, the Board approved a General Authority on Asset Liability
Management (the “Authority”)3. In view of the Bank’s evolving operating
environment, the Authority seeks to provide Management adequate flexibility,
within prescribed limits, to efficiently manage the Bank’s assets and liabilities.
Under the umbrella of the Authority framework, the President of the Bank (the
“President”) is authorized to approve and amend the Guidelines as necessary. The
President shall inform the Board of Directors of the Bank (the “Board”) of any
substantive changes to the Guidelines.
1.1.3 Under the General Authority, the Asset-Liability Management Committee (ALCO)
is responsible for the oversight of compliance with the Authority and the
Guidelines. Matters of interpretation and proper implementation of the Guidelines
shall be referred to ALCO, subject to the final authority of the President and
consistent with ALCO’s Terms of Reference as stated in Paragraph II of
Presidential Instruction P.I. 006/98 as amended.
1.2.1 The principal objective of the Bank’s asset and liability management operations is
to ensure that the Bank is able to provide flexible lending and investment products
that meet client needs, while simultaneously reducing exposure to non-core risks
such as market risk4, counterparty credit risk5 and operational risk in line with the
Bank’s over-arching risk management philosophy6.
1.2.2 In evaluating the risks arising from the Bank’s asset and liability management
operations, the possible non-financial consequences (reputational) shall be
considered in addition to the potential financial losses.
In accordance with the Agreement establishing the Nigeria Trust Fund, the NTF investment management
activities shall be governed by the ADB Asset and Liability Management Guidelines to the extent applicable.
Under the umbrella of the General Authority on the Bank’s Financial Products and Services, ref- ADB/BD/
The Bank’s Asset and Liability Management Authority, ref - ADB/BD/WP/97/138/Rev.2
Market risk is the potential for losses due to fluctuations in the prevailing currency exchange or interest
rates, or due to inadequate liquidity.
Counterparty credit risk means the credit risk arising from asset and liability management operations as
opposed to the credit risks resulting from lending and equity investment operations.
The Bank’s over-arching risk management philosophy is to minimize exposure to non-core business risks in
order to maximize its capacity to bear the core business risks arising from its sovereign and non-sovereign
loan and equity investment portfolios.
1.2.3 The Bank shall conduct its asset and liability management operations to ensure that:
•it has sufficient liquidity to meet projected cash flow requirements for a 1-year
horizon without recourse to additional borrowings from the capital markets7;
•returns earned on its liquidity cover the cost of funding the liquidity to the
•the interest rate profiles of its assets and liabilities protect the Bank’s net
interest margin from fluctuations in market interest rates8, leading to financial
performance consistent with its long-term objectives;
•the currency composition of its assets and liabilities minimizes the impact of
exchange rate fluctuations on its risk capital and that fluctuating exchange rates
do not lead to administrative cost over-runs9;
•exposure to counterparty credit risk arising from asset and liability management
operations is minimized; and
•exposure to operational risks arising from asset and liability management
operations is minimized.
1.2.4 The Bank’s Guidelines, as they pertain to the investment of liquid resources, also
apply to the NTF. In some cases, specific guidelines have been articulated for the
NTF10. In such cases, these specific guidelines shall take precedence.
1.3 Entry Into Force
1.3.1 These Guidelines shall enter into force on the date of their approval by the President
and shall replace and supersede the Asset and Liability Management Guidelines of
February 13, 2001 contained in Document ADB/BD/IF/2001/35 and any
2.1 Interest Rate Risk Management
2.1.1 Interest rate risk is the potential for loss due to adverse movements in market interest
rates. To promote steady growth in its risk capital 11, the Bank’s principal interest rate
risk management objective is to protect its net interest margin12 from fluctuations in
market interest rates13. The Bank shall independently manage its own exposure to
The Bank’s Liquidity Policy, ref - ADB/BD/WP/2002/124
The Bank’s Interest rate Risk Management Framework, ref - ADB/BD/IF/2003/136
The Bank’s Currency Risk Management Policy, ref - ADB/BD/WP/99/61 and Managing the Currency Risks
in the Bank Group’s Administrative Budget, ref – ADB/BD/IF/03/152
See para’s 3.1.23-25, 3.2.13, and 3.3.13.
Risk capital is the metric used by the Bank to measure its risk bearing capacity. As per the Bank’s capital
adequacy policy, ref – ADB/BD/WP/2000/29, risk capital is composed of paid-in capital, reserves, and
Net interest margin is the nominal difference between the interest earned on assets and the interest paid on
Fluctuating market interest rates can affect interest rate sensitive assets and liabilities in two principal ways:
the nominal interest rate or the economic (present) value of all future cash flows. In selecting stability of its
interest rates while giving its clients the flexibility to choose lending terms best suited
2.1.2 To achieve the objective of protecting the Bank’s net interest margin from changes in
market interest rates, the Bank shall match the interest rate sensitivity of both sides of
its balance sheet. As a non-core business risk, it shall strive to maintain an interest rate
risk profile that will lead to financial performance consistent with its long-term
objectives. Within this framework, the Bank shall align the interest rate profile of its
assets and liabilities to one of two principal benchmarks: 1) 6-month LIBOR14 or
equivalent15 for the floating rate components16; and 2) a 10-year uniform re-pricing
profile17 for the fixed rate components. (See appendix 2 on benchmarks)
2.1.3 To the extent possible, the Bank shall passively18 replicate the interest rate risk profile
of the relevant benchmark at the level of each asset or liability group. Where purely
passive management is not a practical alternative, the Bank shall actively manage19 its
interest rate risk profile within tightly controlled risk parameters, such as duration 20
2.1.4 The Bank’s interest sensitive assets and liabilities can be divided into three broad
groups of portfolios: 1) loan portfolios; 2) investment portfolios; and 3) funding
2.1.5 The Bank offers clients three principal types of loan products : 1) pool-based loans21;
2) market-based loans22; and 3) risk management products.
2.1.6 Pool-based loans are cost-pass through assets, whose interest rate periodically adjusts
in line with the average cost of a designated pool of the Bank’s borrowings (see
appendix 5 on debt allocation). Through proper structuring of the designated funding
net interest margin as its principal interest rate risk management objective, the strategies undertaken by the
Bank may increase the volatility of the economic value of its equity.
LIBOR – London Interbank Offered Rate is a standard market reference for short-term interest rates.
For instance, EURIBOR for Euro, JIBAR for South African Rand.
The interest rate on floating rate assets and liabilities resets periodically in line with a specified market
interest rate reference or index before its final maturity as opposed to fixed rate assets and liabilites where the
interest rate remains constant until maturity.
A financial instrument re-prices when its rate of interest adjusts periodically to market rates. A fixed rate
instrument re-prices at maturity whereas a floating rate instrument re-prices at the next rate reset date.
Passive management implies a management style based on rules without taking any view on the future
direction of market factors.
Active management implies a management style based on tactical trading of positions to benefit from the
future direction of market factors, with a view to outperform the associated benchmark.
Duration is a metric for measuring the price sensitivity of an instrument or portfolio of instruments with
respect to changes in market interest rates. The Bank uses Effective Duration for risk control purposes.
Effective Duration is measured by averaging the impact of upward as well as downward changes in market
interest rates on the trading portfolios; it is considered more suitable, given the composition of the Bank’s
trading portfolios, than the main alternatives like Macaulay or Modified Duration.
Also referred to as variable lending rate (VLR) loans
Includes loans that may be created out of the obligation arising from a call on a guarantee provided by the
pools, pool-based loans can provide clients with some of the stability of a fixed rate
loan together with some of the market tracking benefits of a floating rate loan. The
Bank manages two types of pool-based loans: 1) single-currency loans; and 2) multi-
2.1.7 The base interest rate on all single currency pool-based loans is reset every January 1
and July 1 based on the weighted average cost in the preceding semester of a
designated single-currency pool of the Bank’s borrowings. Where applicable, the
prepayment23 premium for single currency pool-based loans is the Bank’s
redeployment cost24 at prevailing market interest rates.
2.1.8 The base interest rate on all multi-currency pool based loans is reset every January 1
and July 1 based on the multi-currency weighted average cost of the Bank’s designated
single-currency pool-based loans. Multi-currency pool-based loans are no longer 25
offered to the Bank’s clients.
2.1.9 Subject to compliance with the Bank’s principal interest rate benchmarks, the Bank
may use derivative transactions26 such as swaps27 or options28 to manage its
prepayment risk or its run-off risk where there are insufficient pool-based loans to
provide full cost pass-through of the designated pools of the Bank’s borrowings. Such
risk management transactions shall be approved by the Vice President, Finance,
subject to ALCO recommendations.
2.1.10 Market-based loans provide clients with the standard lending products found in the
credit markets. The Bank offers clients two principal types of market-based loans: 1)
floating rate loans; and 2) fixed rate loans.
Floating Rate Loans
2.1.11 The base interest rate on all floating rate loans shall be periodically reset in relation to
an agreed reference interest rate index in each currency. If a client requests floating
rate terms that are different from the Bank’s standard 6-month Libor benchmark, the
loan interest rate shall normally be swapped to replicate the Bank’s standard floating
rate benchmark. For sovereign loans, the base interest rate may also include a spread
that shall be determined each semester in line with the Bank’s estimated average
funding margin29 in that currency (see appendix 5 on debt allocation). There is no
prepayment premium for floating rate loans.
Prepayment means repayment by a borrower of all or part of its loan principal before the contractual due
Redeployment cost means the estimated present value of the difference between the cash flows on the loan
being prepaid and current market swaps rates for similar maturities.
Following the introduction of the current range of loan products in 1997.
A derivative transaction is an instrument whose price fluctuates based on the value of an underlying
instrument. In the context of the Bank’s asset and liability management operations, the principal derivative
instruments include forwards, futures, swaps, and options.
A swap is an agreement between two parties to periodically exchange cashflows over an agreed period.
An option gives the owner the right (but not the obligation) to buy (or sell) an agreed underlying instrument
at an agreed price within a specified period of time or on a specific date.
The Bank’s funding margin is the difference between the Bank’s actual cost of floating rate borrowings and
the benchmark, expressed in basis points.
Fixed Rate Loans
2.1.12 The base rate of interest for fixed rate loans shall be determined at the time of rate
fixing based on prevailing market swap rates in the currency of the loan. Clients may
choose among various rate-fixing alternatives30. If rate fixing is not done at each
disbursement, the loan interest rate shall be the floating interest rate in that currency
until the rate is fixed. The prepayment premium for fixed rate loans shall be the Bank’s
redeployment cost at prevailing market interest rates.
2.1.13 Fixed rate loans shall be the preferred source of fixed rate assets to replicate the
Bank’s uniform re-pricing profile benchmark. Where client demand for fixed rate
loans is insufficient to replicate the benchmark, the Bank may either swap outstanding
floating rate loans to create synthetic31 fixed rate assets or it may purchase fixed rate
investments for the equity-backed portfolio. Where demand for fixed rate loans may
result in the net asset benchmark being exceeded, the Bank may swap incremental
fixed rate loans to floating rate to remain aligned with the benchmark. Such swapping
of floating or fixed rate loans shall be endorsed by ALCO based on IRWG
recommendations. Following ALCO endorsement, FTRY shall determine the
appropriate transactions to implement the recommendation and proceed to execute.
Risk Management Products32
2.1.14 Risk management products enable clients to modify the terms of their outstanding
ADB loans. The Bank will only provide risk management products requested by a
client where the Bank is satisfied that there is a sound economic rationale for the
proposed transaction. The Bank shall not purchase any kind of uncovered 33 option
from a client through a risk management product.
2.1.15 The Bank intermediates risk management products such as swaps or options from the
capital markets at prevailing market rates plus a transaction fee.
2.1.16 Where the Bank provides a client risk management product, an offsetting transaction
shall be simultaneously executed with a counterparty in the capital markets such that
the Bank has no residual market risk. The Bank may decide not to execute all or part
of an off-setting transaction with a counterparty in the capital markets if a client risk
management product reduces an existing exposure for the Bank. Such decision shall be
approved by the Vice President, Finance, subject to ALCO recommendations.
ADB Investment Portfolios
2.1.17 The Bank manages its investments in three principal portfolios: 1) an operational
portfolio; 2) a prudential portfolio; and 3) an equity-backed investment portfolio.
Investments in the operational and prudential portfolios, intended to meet the Bank’s
As approved by ALCO informed by the recommendations of the Financial Products Working Group.
In this context a synthetic fixed rate asset is a floating rate loan with an interest rate swap that creates a
fixed rate stream of interest income for the Bank without affecting the floating rate cash flows paid by the
These guidelines seek to address only the ALM issues arising out of risk management products; a more
complete set of guidelines, as required by the Financial Products General Authority, shall address the related
credit and operational issues.
An uncovered option is an option that has been sold to another party where the seller does not own the
underlying instrument or commodity.
liquidity policy objectives, shall be actively managed with the objective of achieving
investment returns consistent with the reference benchmark for each portfolio.
Generally, all investments in the operational and prudential portfolios are held-for-
trading and are regularly marked to market34 whereas investments in the equity-backed
portfolio shall in general be held-until-maturity35. (See appendix 3 on valuation).
2.1.18 The operational portfolio shall be managed to provide the most readily available
source of liquidity to cover the Bank’s short-term cash flow needs. The operational
portfolio shall be funded from floating rate or short-term fixed rate borrowings and
actively managed against a 1-month LIBID36 reference benchmark in each currency.
The average duration of the operational portfolio in each currency shall remain
between 0 and 2 months. The maximum duration of any single investment/derivative
purchased for the operational portfolio shall be 1 year.
2.1.19 The prudential portfolio shall comprise investments held in addition to the operational
portfolio to comply with the Bank’s liquidity policy but not immediately needed for
operational purposes. The prudential portfolio shall be funded from floating rate
borrowings and actively managed against the Bank’s standard 6-month LIBOR
reference benchmark in each currency. The average duration of the prudential portfolio
in each currency shall be maintained within a range of minus 6 months to plus 6
months of the average duration of the reference benchmark. The maximum duration of
any single investment/derivative purchased for the prudential portfolio shall be 10
2.1.20 The Bank may appoint external managers38 to invest part of the funds held in the
prudential portfolio. The Bank’s external managers shall be measured against the same
benchmark as the Bank’s internal managers and unless otherwise specified, shall be
generally39 subject to the same interest rate limitations.
Mark-to-market describes the process of determining the estimated fair value of an asset or liability in
current market conditions. It is an estimate of the price at which an instrument could be traded. The price may
be obtained from a trading counterparty based on prevailing market conditions or may be estimated using a
pricing model, in which case the security is said to be “marked to model”.
Generally accepted accounting rules permit assets to be designated as “held-to-maturity” (HTM) when the
owner has the intention and ability to hold the asset until its final maturity. The Bank’s assets designated as
HTM are not marked-to-market but shall be held at amortized cost using the constant yield amortization
LIBID – London Interbank Bid Rate is the “bid-side” of LIBOR and generally equals LIBOR less 12.5
For the purpose of this guideline, an asset swap shall be considered as a single composite investment.
External managers are companies contracted by the Bank to invest the Bank’s liquid resources under
specific investment mandates. External managers may be appointed, subject to the approval of ALCO based
on the recommendations of FTRY.
Any departures from these guidelines for the external managers shall be specified in their respective
2.1.21 The equity-backed portfolio shall comprise fixed rate investments held specifically to
align the Bank’s net interest sensitive assets 40 with the re-pricing profile benchmark in
each of the special drawing right41 (SDR) currencies. Equity-backed investments may
be used as one alternative to swapping floating rate loans if client demand for fixed
rate loans is insufficient to meet the Bank’s requirement for fixed rate assets. The
purchase of fixed rate investments for the equity-backed portfolio shall be endorsed by
ALCO based on IRWG recommendations. Following ALCO endorsement, FTRY
shall determine the appropriate transactions to implement the recommendation and
proceed to execute.
Nigeria Trust Fund Investments
2.1.22 In seeking to earn a stable and reasonable return on invested liquidity, the NTF’s
principal interest rate risk management objective is to reduce the sensitivity of its
investment returns to changes in market interest rates. To achieve this objective, NTF
investments shall be managed in two portfolios: 1) an operational portfolio; and 2) an
2.1.23 The NTF operational portfolio shall provide a readily available source of liquidity
to cover both expected and unexpected disbursements as well as any other probable
cash outflows. The operational portfolio shall be actively managed against a 3-
month LIBOR reference benchmark. The average duration of the operational
portfolio shall remain between 0 and 12 months. The maximum duration of any
single investment purchased for the operational portfolio shall be 1 year. Generally,
investments in the operational portfolio shall be held-for-trading and regularly
marked to market.
2.1.24 The NTF investment portfolio shall consist of funds that are not immediately required
for loan disbursements and therefore may be invested for a longer horizon than
investments in the operational portfolio. The investment portfolio shall be aligned to a
temporary fixed-maturity benchmark not exceeding the Sunset date of NTF.
Generally, investments in the investment portfolio shall be purchased with the
intention to hold them until their maturity and shall not be marked to market.
2.1.25 Pursuant to the provisions of the Agreement establishing the Bank and the Financial
Regulations42, the Bank may borrow funds to supplement its capital resources. The
principal objective of the Bank’s funding operations is to provide resources, on terms
consistent with the risk management objectives and limitations specified in the
Guidelines, at the lowest cost. In seeking to achieve the lowest overall cost of funds,
due consideration shall be given to diversification of funding sources and increased
investor awareness, to assure continuous access to the principal markets.
Net interest sensitive assets means all interest sensitive assets less all interest sensitive liabilities. Net
interest sensitive assets is a proxy for the interest sensitivity of the Bank’s equity.
The special drawing right is a currency unit used by the IMF. The Bank’s reporting currency, the Unit of
Account, is the equivalent of the SDR.
Chapter 9 of the Financial Regulations of the ADB, 2nd Edition, 2000
2.1.26 Subject to the debt limits and the annual borrowing program approved by the Board,
the Bank may borrow funds43 to finance: 1) lending operations; and 2) liquid
investments (See appendix 4 on debt limits).
2.1.27 The interest rate sensitivity44 of resources borrowed to finance the Bank’s lending
activities shall be matched to the target interest rate sensitivity of the related lending
product. To achieve the desired balance between stability and market tracking
characteristics, resources borrowed to finance the pool-based loans shall be
predominantly fixed rate funds with maturities sufficiently spread out so as to permit
regular sampling of market interest rates when refinanced. No more than 50% of the
borrowings in any single-currency pool shall be floating rate borrowings (See
appendix 5 on debt allocation).
2.1.28 The interest rate sensitivity of resources borrowed to finance market-based loans shall
be aligned to the Bank’s standard floating rate benchmark in each currency.
2.1.29 The interest rate sensitivity of resources borrowed to finance the Bank’s portfolio of
liquid investments shall be aligned to the Bank’s standard floating rate benchmark in
each currency. Where the Bank borrows for maturities of less than 1 year, such
borrowings shall be used to finance cash and liquid investments in the operational
2.1.30 To reduce the risk of sharp fluctuations in the Bank’s average funding spread that
could be caused by large refinancing of borrowings during a period of unfavorable
market conditions, the Bank shall avoid excessive bunching of borrowing maturities or
call dates. In order to ensure due consideration for refinancing risk, any borrowing
transaction that may result in more than 25% of the Bank’s outstanding borrowings
maturing in any given year45, shall be subject to ALCO endorsement.
2.2 Currency Risk Management
2.2.1 Currency risk is the potential loss due to adverse movements in market currency
exchange rates46. To promote stable growth in its risk bearing capacity, the Bank’s
principal currency risk management objective is to protect its risk capital from
currency transaction and translation risks47 due to fluctuations in currency exchange
rates. The Bank shall independently manage its own exposure to currency exchange
rates while giving its clients the flexibility to choose the lending currencies best suited
2.2.2 To achieve the objective of protecting the Bank’s risk capital from changes in
currency exchange rates, the Bank shall match the currency composition of both
sides of its balance sheet. As a non-core business risk, the Bank shall not seek
Borrowing activity may also be conducted with the purpose of capital market development in regional
Interest rate sensitivity refers to the extent to which the interest rate of a financial instrument varies with
changes in market interest rates.
For the purposes of this guideline, callable debt shall be assumed to mature at the next call date.
The terms currency exchange rate and foreign exchange rate are used inter-changeably.
Currency translation risk is the potential loss in the value of an asset or liability denominated in one
currency when its value is expressed in another currency. Currency transaction risk is the potential loss when
an asset or liability in one currency is exchanged into another currency.
gains by anticipating the future direction of currency exchange rates, rather, it shall
strive to maintain a currency risk profile that will lead to financial performance
consistent with its long-term objectives.
2.2.3 To the extent possible, the Bank passively manages its currencies to align the
currency profile of its net assets48 with its currency benchmark (See appendix 2 on
benchmarks). The Bank’s currency benchmark is the currency composition of its
reporting currency, the Unit of Account. Where purely passive management is not a
practical alternative, the Bank actively manages its currency risk profile within
tightly controlled risk parameters.
2.2.4 The Bank may conduct currency exchange transactions on its loan, investment, and
funding portfolios for the purpose of maintaining the alignment of the currency
composition of the Bank’s net asset with its currency benchmark. The Bank may also
conduct currency exchange transactions for the purpose of hedging 49 the currency
risks inherent in the annual administrative and capital expenditure budgets. Such
currency risk management transactions shall be endorsed by ALCO based on
CUWG recommendations. Following ALCO endorsement, FTRY shall determine
the appropriate transactions to implement the recommendation and proceed to
2.2.5 The Bank currently offers single-currency pool-based loans in three currencies50:
USD; EUR; JPY and market-based loans in four currencies: USD; EUR; JPY; and
ZAR. The Bank may offer market-based loans in any other currency where there is
sufficient borrower demand and where it can efficiently fund itself51, subject to the
President’s approval, informed by the recommendations of ALCO.
2.2.6 All loan charges and principal repayments shall be paid in the currency(ies) of the
2.2.7 The Bank may intermediate a client risk management product, such as a currency
swap, to convert the currency of a client’s outstanding ADB loan into another
currency, where there is an appropriate swap market, or alternative mechanisms, to
off-set the risk.
2.2.8 Where the Bank provides a guarantee for a loan denominated in a local currency,
the guarantee shall be denominated in one of the Bank’s lending currencies for
Net currency assets is the difference between the assets denominated in currencies and the liabilities
denominated in the same currencies. Net currency assets is a proxy for the effective currency composition of
the Bank’s equity.
Hedging describes the process whereby the risks inherent in an instrument or portfolio of instruments is
mitigated with respect to a target risk profile. In this case, the target is the budget and the source of risk is
fluctuating exchange rates and the impact on actual administrative expenditures.
Although multi-currency pool-based loans denominated in CHF remain outstanding, the Bank no longer
offers new pool-based loans in CHF. However, the average cost of the CHF borrowing pool is included in the
cost of multi-currency pool-based loans.
The concept of “efficient funding” means that the Bank would not incur undue costs in managing the
resources after the funds have been mobilized and before and after a loan has been disbursed and repaid.
The amount payable in local currency in the event of a call on the guarantee is capped, using the spot
exchange rate, at the lesser of (i) the maximum guaranteed amount in the Bank’s lending currency, or (ii) the
2.2.9 The Bank may conduct currency purchases to fulfill client disbursement or
repayment requests, where the Bank acts as an agent but takes no principal position in
the transaction. All costs associated with currency purchases are borne by the client.
ADB Investment Portfolios
2.2.10 The Bank may conduct cross-currency investment transactions53 provided that the
Bank has no residual currency exposure54.
2.2.11 Where the Bank has appointed external managers to invest part of the Bank’s
liquid resources, the external managers shall not conduct transactions that expose
the Bank’s assets to currency exchange risks.
2.2.12 In addition to using swaps to maintain the alignment of the currency composition of
the Bank’s net asset with its currency benchmark, the Bank may also conduct
currency swaps to convert liabilities into another currency where resources in
another currency are required for operational purposes provided that the Bank has no
residual currency exposure.
Nigeria Trust Fund Investments
2.2.13 The NTF’s principal currency risk management objective is to avoid exposure to
fluctuations in currency exchange rates. To achieve this objective, the funds
invested for the NTF shall be maintained in USD or fully hedged back into USD,
the currency in which NTF resources are denominated.
2.3 Liquidity Risk Management
2.3.1 Liquidity risk is the potential for loss55 resulting from insufficient liquidity to meet
cash flow needs in a timely manner. The Bank’s principal liquidity risk
management objective is to hold sufficient liquid resources to enable it to meet all
probable cash flow needs for a rolling 1-year horizon without additional financing
from the capital markets.
2.3.2 To achieve this objective, the Bank’s liquidity policy prescribes a range for the
volume of liquid assets. This range is calibrated to reflect the size of the Bank’s
lending operations while providing adequate flexibility to implement a cost-
effective borrowing program. The lower end of the range is defined by the
prudential minimum level of liquidity (PML) and the normal upper end of the
range is demarcated by the operating level of liquidity (OLL).
2.3.3 The PML shall be an estimate of the Bank’s probable net cash requirement for a 1-
year horizon and shall be recomputed quarterly as the sum of four components: 1)
amount, in local currency, that has been called.
A cross-currency investment transaction is an investment in one currency that is transformed into another
currency using forward foreign exchange transactions.
Currency exposure caused by unwinding the transaction before maturity shall not constitute an exception to
Including the adverse impact on reputation caused by the inability to maintain normal lending operations.
1-year debt service payments; 2) 1-year projected net loan disbursements56 if
greater than zero; 3) loan equivalent value of committed guarantees; and 4)
undisbursed equity investments. The level of liquidity shall always be maintained
above the PML.
2.3.4 The OLL shall be computed quarterly as the PML plus 50% of the stock of
committed undisbursed loans57. The OLL, as the upper end of the range for
liquidity, is an operational guideline that may be periodically exceeded for
justifiable operational reasons without material risk to the Bank.
2.3.5 Investments held in the Bank’s operational and prudential portfolios shall be
considered as “eligible liquidity” 58. In addition, any investments held in the equity-
backed portfolio with a remaining maturity less than 1-year shall also be
considered as eligible liquidity.
2.3.6 Where the Bank has appointed external managers to invest part of its liquid assets,
in determining the amount of externally managed liquidity, the Bank shall ensure
that internally managed resources do not fall below 75% of the prudential
minimum level of liquidity. The external managers shall be required to redeem the
Bank’s liquid resources within 3059 calendar days of being given such notice by the
Marketability of Investments
2.3.7 Liquidity risk is also the potential for loss resulting from the inability to sell an
investment or buy-back a short position at a reasonable price within a reasonable
period of time. The Bank’s principal investment liquidity objective is to ensure that
the investments in the operational and prudential portfolios can be liquidated 60
promptly and without incurring undue transaction costs under normal market
conditions61. To achieve this objective, a number of liquidity restrictions shall apply
to the Bank’s investments.
2.3.8 In view of the potential cost of holding highly liquid investments 62, the size of the
operational portfolio shall generally be linked to the estimated debt service flows
over the following 3 months63.
2.3.9 All securities purchased shall meet the liquidity objectives of the targeted investment
portfolio. Metrics such as the trading volume of a particular security, the number of
brokers/dealers providing two-way markets in the security, typical bid/ask spreads64,
and similar measures shall be used to gauge the overall liquidity of an investment at
Net loan disbursements means loan disbursements less loan repayments. It is an estimate of the net loan
transfers to clients.
A committed undisbursed loan is a loan that has been signed, but has not fully disbursed.
Eligible liquidity is a term used to describe the liquid resources that shall be used to monitor compliance
with the liquidity range.
The 30-day period includes the notice period plus the liquidation period.
Liquidated means to close-out a transaction for cash or the equivalent.
Liquidity cannot be precisely measured and may deteriorate sharply depending on various market factors.
Such circumstance would be not considered normal market conditions.
Due to the normally upward sloping shape of the yield curve.
When monitoring the size of the operational portfolio vis-à-vis the 3 month debt service flows, a cushion of
about UA 50-75 million to cover administrative expenses and unexpected outflows may be considered
the time of purchase. All new investments shall be ranked at the time of purchase on
the basis of estimated liquidity into one of two categories: 1) very liquid; and 2)
moderately liquid (See appendix 6 on liquidity).
2.3.10 No security shall be purchased for the operational or prudential portfolios of the
Bank, or the operational portfolio of NTF, if the total amount outstanding of the
issue is less than USD 100 million65. Investments in a specific issue should not
exceed 15% of the outstanding issue or tranche66 of an issue, as the case may be.
2.3.11 In order to restrict short sales67 to the most liquid investments, short-selling shall be
permitted only for government securities, agency debt and agency mortgages
including to-be-announced (TBA) issues. Further, short-sales may be conducted
using futures68 or forwards for hedging the interest rate or currency risk of an
Nigeria Trust Fund Investments
2.3.12 The NTF’s principal liquidity risk management objective is to ensure that it holds
adequate liquid resources to meet its operational cash flow needs. To achieve this
objective, 25% of the Fund’s investments shall be held in its Operational Portfolio.
2.4 Counterparty Credit Risk Management
2.4.1 Counterparty69 credit risk is the potential for loss due to failure of a counterparty to
honor an obligation. The Guidelines prescribe the rules that govern counterparty
credit risk for asset and liability management operations. Separate guidelines
prescribe the rules governing credit risk management for the Bank’s sovereign and
non-sovereign loan and equity investment portfolios.
2.4.2 As a non-core business risk, the Bank’s principal counterparty credit risk
management objective is to minimize the likelihood of financial losses, business
disruption, or reputational damage resulting from credit failures. To achieve this
objective, the Bank’s asset and liability management operations shall be conducted
within a prudential framework of: 1) approved counterparties; 2) minimum credit
Bid/ask spreads describes the difference between the price or yield at which an instrument may be
bought/sold in the market.
An issue shall be considered to consist of the aggregate amount of a security or group of securities, which
have characteristics permitting them to trade interchangeably in the market.
Asset and mortgage backed securities are generally issued as a large transaction with multiple tranches. A
tranche of an issue is a special category of assets with similar risk characteristics.
Selling an investment “short” refers to the sale of a security without owning it.
A future is a standardized contract that is traded on a regulated exchange for the delivery of a prescribed
instrument(s) at prescribed future points in time. Most futures contracts are closed-out for cash before
A counterparty means any party to an asset and liability management transaction excluding the Bank’s
clients for loan or equity investments.
rating standards70; 3) counterparty exposure limits; and 4) counterparty credit risk
2.4.3 There are three principal groups of counterparties: 1) investment counterparties 71;
2) derivative counterparties72; and 3) trading counterparties73. All counterparties
shall be subject to the approval of Vice President, Finance. Asset and liability
management transactions shall only be conducted with approved counterparties,
which meet the Bank’s minimum credit standards and are located in or controlled
by entities based in member countries of the Bank.
2.4.4 Swaps, forwards, options, other over-the-counter74 (OTC) derivative transactions
and repurchase or reverse-repurchase agreements shall be only conducted with
approved counterparties or clients for a risk management product where a standard
agreement75 between the Bank and the relevant counterparty or client has been duly
completed (See appendix 7 on trading agreements).
Minimum Credit Rating
2.4.5 Subject to the transaction-specific credit limitations set forth in the section on
authorized transactions, the minimum credit rating for any investment76 with a
remaining final maturity longer than 1 year shall be AA-/Aa3. The minimum credit
rating for any investment with a remaining final maturity of 1 year or less shall be
A/A2 or the equivalent77.
2.4.6 The minimum credit rating for counterparties to any derivative transaction,
regardless of the remaining final maturity, shall be AA-/Aa378.
The Bank’s credit standards are based on the ratings from approved credit rating agencies. These shall
include Standard and Poors, Moody’s Investors Service, Fitch Ratings or any other rating agency approved by
ALCO. All references to credit ratings in the Guidelines shall mean a credit rating by an approved rating
agency. For purposes of eligibility, a counterparty’s credit rating means the lowest equivalent credit rating by
an approved rating agency.
Investment counterparty means the issuer or guarantor of a security, obligation, or other debt instrument
including banks that take time deposits etc.
Derivative counterparty means any institution that acts as the counterparty with the Bank in a derivative
Trading counterparty means brokers, dealers, securities companies, custodians, clearing houses, futures
An over-the-counter derivative transaction is conducted directly with a counterparty as opposed to an
exchange-traded derivative transaction, which is traded on a regulated exchange.
A standard agreement is a standardized legal agreement defining matters such as the rights and obligations
of the counterparties and standard market terminology. A standard agreement shall include provisions for
netting of exposures. Examples of such agreements include ISDA (International Swaps and Derivatives
Association) master agreements and ISMA (International Securities Market Association) master repurchase
Credit rating of investment refers to the rating applicable for the specific investment; ratings exclusively
applicable for other investments by the same issuer shall not be used as a proxy rating.
Rating scales may differ between rating agencies and for different instruments. For the purpose of the
Guidelines, any specified credit rating shall include any recognized equivalent rating by an approved rating
agency. For investments with a money market rating, the minimum credit rating shall be A-1/P-2 or the
equivalent, subject to the issuer’s long term unsecured rating being at least A/A2.
The Bank’s capacity to manage collateral is currently being established. Following the implementation of
the collateral management system over a period of time, ALCO may, if it determines that the collateral
2.4.7 The minimum credit rating for trading counterparties79 shall be A/A280. In
exceptional cases the Bank may approve trading counterparties whose credit rating
is below the minimum standard or are not rated. Non-rated counterparties shall be
subject to the approval of Vice President, Finance, subject to the recommendation
of ALCO after a thorough review of the counterparty’s creditworthiness.
2.4.8 If any credit rating81 of a counterparty to an asset and liability management
transaction falls below the minimum level stated in the Guidelines, this shall be
treated as an exception to the Guidelines.
2.4.9 No asset and liability management transactions shall be conducted where a
counterparty is known to be under review for a credit rating downgrade that may
bring it below the minimum rating allowed by the Guidelines.
2.4.10 While the minimum credit rating standards will be generally applicable for all asset
and liability operations, the credit rating restrictions may be partially relaxed for
local currency operations to enable adequate availability of investment avenues
or/and derivative counterparties for implementing interest rate risk management
strategies. Any such downward recasting of the minimum standards shall be
subject to approval by ALCO.
Counterparty Exposure Limits
2.4.11 Counterparty exposure82 limits shall be set and monitored by ALCO, informed by
the recommendations of FFMA. Counterparty exposure limits shall be based on the
credit rating of the counterparty and determined as a percentage of the lower of
either the Bank’s risk capital or the counterparty’s net worth (See appendix 8 on
2.4.12 The counterparty exposure for asset and liability management transactions shall be
measured in accordance with the methodologies83 approved by the Bank for
International Settlements (BIS). Counterparty exposure shall be measured net of
the current market value of any collateral84 posted to the Bank’s account by a
2.4.13 Where the Bank has appointed external managers to invest part of its liquid assets,
the counterparty exposures from the investments made by the external managers
shall be aggregated at the end of each month with internal counterparty exposures
to determine the Bank’s total counterparty exposures.
management system is functioning satisfactorily, thereby effectively reducing counterparty risk, recommend
to the President a lowering of the minimum credit rating for counterparties with whom the Bank has a
collateral exchange agreement (CSA) to A-; this will enable the Bank to access a wider range of
counterparties while keeping counterparty credit exposure under control.
Excluding authorized exchanges and clearing houses.
The risk of failure of a trading counterparty to complete a committed transaction is referred to as settlement
risk. The maximum settlement period for any non-derivative asset and liability management transaction in the
secondary market shall be 1 month.
When a counterparty’s credit ratings are not all equivalent, it is deemed to have a “split-rating”.
Counterparty exposure means an estimate of the Bank’s maximum current financial loss if a counterparty
Where netting agreements are applicable, exposures with the counterparty will be measured as the net
exposure where all assets and liabilities with a counterparty are aggregated and off-set.
Collateral means any cash or authorized securities.
Counterparty Credit Risk Mitigation Measures
2.4.14 The Bank seeks to reduce counterparty credit exposures using collateral whenever
feasible. The Bank shall seek to establish collateral exchange agreements with all
derivative counterparties85 (See appendix 7 on trading agreements).
2.4.15 The threshold level of net credit exposure, which shall require the counterparty to
post collateral, shall be based on the rating of the counterparty.
2.5 Authorized Asset and Liability Management Transactions
2.5.1 There are three principal groups of authorized asset and liability management
transactions; 1) investment transactions; 2) funding transactions; and 3) derivative
2.5.2 Inclusion of new products under the authorized asset and liability transactions will
be subject to approval by ALCO.
2.5.3 Where the Bank has appointed external managers to invest part of its liquid assets,
the external managers shall undertake operations that are generally consistent with
the transaction limitations in the Guidelines, unless specified otherwise.
2.5.4 Authorized investment transactions are classified by type of investment
counterparty, maturity, and/or type of fixed income instrument. Subject to the
limitations set forth in the Guidelines, the Bank may invest in the following
2.5.5 Debt obligations issued or unconditionally guaranteed by a government
(government securities). The remaining final maturity86 for Government securities
shall not exceed 30 years for AAA/Aaa rated securities, 15 years for securities with
a minimum rating of AA-/Aa3, and 1 year for securities with a minimum rating of
Government Agencies and Supranationals87
2.5.6 Debt obligations issued or unconditionally guaranteed by an agency or
instrumentality of a government or a supranational institution (agency and
supranational securities). The remaining final maturity for agency and
supranational securities shall not exceed 30 years for AAA/Aaa rated securities, 15
Collateral exchange agreements shall not be mandatory. However, all other things being equal, the Bank
shall give preference to derivative counterparties where a collateral exchange agreement has been duly
Remaining final maturity means the time until final maturity when a security is purchased (as opposed to
the original final maturity when the security is issued).
Supranational means institutions with multi-national government shareholding and includes multilateral
years for securities with a minimum rating of AA-/Aa3, and 1 year for securities
with a minimum rating of A/A2.
2.5.7 Debt obligations issued or unconditionally guaranteed by a depository bank88 (bank
obligations). The remaining final maturity for bank obligations shall not exceed 10
years for AAA/Aaa rated securities, 5 years for obligations with a minimum rating
of AA-/Aa3, and 6 months for obligations with a minimum rating of A/A2.
2.5.8 Debt obligations issued or unconditionally guaranteed by a corporation including
financial institutions89 (corporate securities). The remaining final maturity for
corporate securities shall not exceed 10 years for AAA/Aaa rated securities, 5
years for securities with a minimum rating of AA-/Aa3, and 6 months for
securities with a minimum rating of A/A2.
2.5.9 The total value of investments in corporate securities shall not exceed 35% of total
investments in the combined operational and prudential portfolios and 25% of total
investments in the equity-backed portfolio.
Mortgage and Asset-Backed Securities
2.5.10 Mortgage-backed90 (MBS) or asset-backed securities91 (ABS) with a minimum
rating of AAA/Aaa; for securities with only a short-term rating, the minimum
rating shall be A-1+/P-1. The Bank shall only invest in MBS or ABS where
repayment projections are available.
2.5.11 Due to their particular risk characteristics, the Bank shall not invest in the
following types of MBS and ABS: where the underlying collateral is high-yield
bonds92 or emerging market debt93; principal only securities94; and super floaters95.
2.5.12 The total value of investments in MBS96 and ABS shall not exceed 35% of total
investments in the combined operational and prudential portfolios and 10% of total
investments in the equity-backed portfolio.
Obligations of depository banks means all marketable securities as well as non-marketable instruments such
as time deposits. Depository bank means deposit-taking banks supervised and regulated by the central bank.
Financial institutions means all non-bank finance corporations such as insurance companies and capital
A mortgage-backed security is a debt obligation secured by the cash flows of a pool of mortgages.
An asset-backed security is a debt obligation secured by the cash flows of a pool of assets such as credit
card receivables, auto loans, etc. A mortgage-backed security is a specific type of asset-backed security.
High-yield bonds are debt investments with a credit rating below BBB-/Baa3.
Emerging market debt is any sovereign debt obligation of a country rated below A- or obligation of a
corporation located in a country rated below A-.
POs are structured securities where the holder is only entitled to the principal repayments of an underlying
Super floaters are floating rate securities whose rate of interest moves faster than market interest rates.
Debt/securities issued or unconditionally guaranteed by agencies such as Fannie Mae, Ginnie Mae, Freddie
Mac etc are excluded from this limit.
Securities Repurchase Agreements
2.5.13 Repurchase agreements (repo97) on authorized securities. For unrated
counterparties, the remaining final maturity for such transactions shall not exceed 3
2.5.14 Money market mutual funds98 with a minimum rating of AA-/Aa3 or equivalent.
2.5.15 Authorized funding transactions are classified by type of investor, maturity, and/or
type of fixed income instruments issued. Subject to the limitations set forth in the
Guidelines, the Bank may borrow using the following transactions:
2.5.16 Public99 or privately-placed100 debt instruments with a final maturity of less than 1
year for cash management purposes. Such debt issues are generally fixed rate and
may be swapped to meet the Bank’s specific funding needs.
2.5.17 Public or privately-placed debt instruments with a final maturity of 1 year or longer
to fund the loan and investment portfolios. Such debt issues may be either on a
fixed or floating101 rate basis and may be swapped to meet the Bank’s specific
2.5.18 The Annual Borrowing Program shall be approved by the Board of Directors. All
borrowing transactions shall be subject to the approval of Vice President,
Finance102. There shall be two exceptions: 1) borrowings whose final maturity is
less than 1 year; and 2) privately-placed transactions pre-authorized by FNVP after
consultation with FFMA under an “Open Mandate” 103.
2.5.19 The Bank may redeem any outstanding borrowing through the exercise of call
options, or other debt buy-back or exchange strategies. Where the redemption of an
outstanding borrowing would imply an up-front cost to the Bank, the transaction
shall be approved by the Vice-President, Finance, subject to ALCO
2.5.20 Where the Bank has appointed external managers to invest part of its liquid assets,
the external managers shall not borrow funds, except as part of a repurchase
A repo is a transaction whereby the owner of a security temporarily lends it to a counterparty against cash
collateral of equivalent market value.
A mutual fund is an investment vehicle with a prescribed investment mandate that pools resources for
A public issue is a borrowing issued to multiple investors on a public market. Examples include the
Eurobond, Yankee, and Samurai public bond markets.
A privately-placed issue is a borrowing issued directly to a single investor or a limited number of investors.
For the purpose of this guideline, floating rate debt may include debt with structured coupons.
For all borrowings with new structures, FTRY shall send a copy of the proposed transaction to FFMA for
review. FFMA shall confirm the proposed transaction’s compliance with the Guidelines, before the proposal
is submitted to FNVP for approval.
An open-mandate is a temporary standing agreement with a counterparty to issue private placements for
the Bank within prescribed limits.
Securities Reverse Repurchase Agreements
2.5.21 Reverse repurchase agreements (reverse repo104) on authorized securities. For
unrated counterparties, the remaining final maturity for such transactions shall not
exceed 3 months.
2.5.22 The Bank will only use derivative transactions whose risk characteristics can be
clearly understood, measured, and valued internally by the Bank. The reason for
using any derivative transaction shall be documented and all risk exposures related
to derivative transactions shall be reported separately as well as in aggregate with
the underlying transactions. All derivative transactions shall be regularly marked-
to-market, regardless of whether intended to be held-for-trading or held-to-
2.5.23 Subject to the letter and intent of the interest rate and currency risk limitations set
forth in the Guidelines, the Bank may use the following derivative transactions:
Forwards and Futures
2.5.24 Foreign exchange forwards or futures in line with its currency risk management
objectives and limits. Currency forwards or futures shall either be linked to specific
underlying assets and liabilities or pools of assets and liabilities in the same
2.5.25 Forward interest rate agreements105 (FRAs) or interest rate futures in line with its
interest rate risk management objectives and limits. FRAs or interest rate futures
shall either be linked to specific underlying assets and liabilities or pools of assets
and liabilities in the same currency.
2.5.26 Currency and interest rate swaps in line with its interest rate or currency risk
management objectives and limits. Currency swaps shall either be linked106 to
specific underlying assets and liabilities or pools of assets and liabilities in the
same currency. Interest rate swaps shall either be linked to specific underlying
assets and liabilities or pools of assets and liabilities with homogeneous interest
rate risk characteristics (macro-hedge or portfolio swaps).
2.5.27 Currency and interest rate swaps to offset an existing swap, where the underlying
borrowing has been called, and where the cancellation of the original swap is
uneconomical. The terms of such offsetting swaps should mirror the terms of the
A reverse repo is a transaction whereby the holder of cash temporarily lends the cash to a counterparty
against security collateral of equivalent market value.
A forward rate agreement is a contract for a fixed rate deposit at a specified interest rate at a specified
future point in time.
A swap is said to be “linked” to an underlying asset or liability if the risk characteristics of one side of the
swap match the risk characteristics of the underlying asset or liability.
2.5.28 Other types of swaps including commodity107 swaps to offer risk management
products to clients, where the Bank is not exposed to any residual exposure to the
underlying commodity or index.
2.5.29 Purchase of currency or interest rate options such as caps 108, floors109, and
swaptions110 in line with its interest rate or currency risk management objectives and
limits; the remaining life of purchased stand-alone options shall not exceed one year.
2.5.30 Purchase of other types of options including commodity options to offer risk
management products to clients, where the Bank is not exposed to any residual
exposure to the underlying commodity or index.
2.5.31 Sale of covered options111, such as embedded options. All sales of covered but
stand-alone options112 for investment management purposes shall be subject to a
maximum remaining maturity of 1 year and shall be communicated to ALCO for
information. All sales of covered but stand-alone options113 for liability
management purposes shall be approved by the Vice President, Finance subject to
2.5.32 The Bank shall not sell any uncovered options directly or indirectly.
2.6 Operational Risk Management
2.6.1 Operational risk is the potential for loss due to failures of processes or systems114,
exogenous events, or unenforceability of legal contracts. The Bank’s principal
operational risk management objective is to minimize operational risk in the
management of its assets and liabilities in a cost-effective manner. To achieve this
objective, the Bank seeks to: 1) foster a professional work environment with the
highest ethical standards; 2) hire and train sufficient and qualified staff in line with
the nature and magnitude of the risks inherent in each activity; 3) establish
adequate and documented processes and controls using the appropriate technology
and systems; and 4) maintain adequate business continuity arrangements.
2.6.2 Staff involved in the implementation of the Bank’s asset and liability management
operations shall maintain professional standards consistent with Bank’s Code of
Conduct and with such other standards as may be prescribed from time to time.
A commodity swap is a transaction where the interest rate on the swap is determined from a formula using
the price of a specified commodity.
A cap is an option contract that is used to set the maximum rate of an underlying instrument.
A floor is an option contract that is used to set the minimum rate of an underlying instrument.
A swaption is an option where the underlying instrument is a swap.
A covered option refers to the possession of the underlying asset by the Bank.
Also referred to as ‘covered call writing’
A stand-alone option is an option that is not embedded in an asset or liability.
Process failures could be due to process inadequacies, human error, or fraud. They could also be caused by
break-down of a system or technology that supports the process.
2.6.3 The profiles of all positions created for the implementation of the Bank’s asset and
liability management operations shall be consistent with the nature and risks of the
required duties. All staff assigned to such positions shall be adequately trained and
instructed to perform the required duties. Each critical function shall have an assigned
staff (a back-up) that can competently substitute for the principal staff normally
performing such critical duties.
2.6.4 Processes shall be established that efficiently carry out the desired activities while
providing adequate controls to reduce the risk of system failure, human error, or
fraud. It is the responsibility of each individual involved in the Bank’s asset and
liability management operations to understand the Bank’s processes and to
continually strive to improve the control framework.
2.6.5 There are three principal groups of staff involved in the Bank’s asset and liability
management transactions: 1) front-office staff; 2) middle-office staff; and 3) back-
office staff. In addition, the Bank’s asset and liability management process are
directly supported by IT, accounting, and legal staff.
2.6.6 Only front-office staff115 (traders) duly authorized by the Director, FTRY may carry
out the Bank’s asset and liability management transactions. All asset and liability
management transactions shall be carried out by a mechanism 116 approved by the
Director, FTRY with a complete and reliable record. All transactions undertaken by
telephone shall be subject to voice recording and shall be reported at the time of
execution in a “trade-ticket”. Front-office staff executing any transaction shall be
responsible for promptly entering the complete transaction into the Bank’s asset and
liability management systems117 and for ensuring the integrity of the dynamic
transaction data118 in the system.
2.6.7 Only middle-office staff119 duly authorized by the Director, FFMA may validate that
transactions comply with the Guidelines for further back-office processing. The
Director, FFMA may waive the requirement for middle-office validation for specified
low-risk transactions. The middle-office shall be responsible for the valuation of all
asset and liability transactions, and along with the back-office, for the integrity of all
the static data120 and dynamic market data121 in the system.
Front-office staff means personnel who can commit the Bank in an asset and liability management
A mechanism in this context includes telephone, fax, telex, SWIFT message, Reuters, Bloomberg,
EUCLID, or any other recognized method of committing the Bank in a transaction.
The Bank’s princpal asset and liability management system is SUMMIT. In addition, the Bank uses
NUMERIX as a pricing engine integrated into SUMMIT for valuing certain complex transactions.
Dynamic transaction data includes data such as the price, amount, trading counterparty, settlement date, etc
of a specific transaction.
Middle-office staff means personnel who validate transactions before they enter the Bank’s transaction
database and are processed for payment. Middle-office staff provide an independent oversight function on all
asset and liability management transactions.
Static data includes financial static data such as calendar codes, transaction static data such as booking
codes, and post market static data such as settlement instructions.
Dynamic market data means all market rates such as interest rates, exchange rates, bond prices etc.
2.6.8 Only back-office122 staff duly authorized by the Director, FTRY may settle123 asset
and liability management transactions. Settlement of all transactions shall be subject
to proper verification of trade confirmations from the counterparties by back-office
2.6.9 FTRY and FFMA shall, in consultation with GECL, negotiate the required
agreements with approved Bank counterparts to implement the permitted asset and
liability management transactions. All such transactions shall be approved by the
Vice-President and the relevant transaction contracts shall be signed by the
authorized officer designated in the Delegation of Authority Matrix.
2.6.10 Routine processes shall be automated by implementing systems that safeguard the
integrity of the Bank’s financial data and enforce the Bank’s critical asset and liability
2.6.11 Only information systems staff duly authorized by the Director, Information Systems
and Methods (CIMM) may establish access controls124 for the Bank’s asset and
liability transaction and information systems, transaction database, and the transaction
2.6.12 The Bank shall maintain appropriate procedure manuals for all asset and liability
management processes. It shall be the responsibility of each business unit to ensure
that the relevant procedure manuals are disseminated, understood, and complied
with. It shall also be the responsibility of each business unit to ensure that the
relevant procedure manuals are regularly updated as their processes evolve.
2.6.13 An implementation plan and adequate back-up arrangements to ensure business
continuity for all critical asset and liability management operations shall be
maintained in case of events that lead to temporary or sustained disruption of
normal operations. Where appropriate, insurance shall be purchased to cover the
financial losses due to such exogenous events.
3.1.1 The Director, Treasury (FTRY), under the direct supervision of the Vice-President,
Finance (FNVP), shall have primary responsibility for the implementation of the
Back-office staff means personnel who complete the process of payment and exchange in an asset and
liability management transaction.
Settle or settlement refers to the process whereby a transaction is completed through the exchange of
payment for the security or obligation between the buyer and the seller.
Access control means the ability of an individual to log-in, view, or change data in a system or database.
Bank’s asset and liability management operations125. The Director, Financial
Management (FFMA), shall have primary responsibility for monitoring compliance
with the Guidelines.
3.1.2 It shall be the responsibility of all Bank staff involved in the Bank’s asset and liability
management operations to be familiar with the Guidelines. Each officer authorized to
carry out asset and liability management transactions shall only enter into transactions
that are consistent with the limitations set forth in the Guidelines.
3.1.3 Each limit set forth in the Guidelines that requires a calculation shall be applied as of
the close of business, unless otherwise specified. In certain instances, the limitations
set forth in the Guidelines cannot be monitored with precision, even on a close of
business basis. In such cases, the applicable limits will be complied with on a best
3.2.1 FFMA shall have primary responsibility for coordinating the resolution of exceptions
to the Guidelines. Any Bank officer that becomes aware of a breach of the Guidelines
shall report such exceptions to their Division Manager by the close of business that
day and simultaneously inform the Manager, FFMA.3. The Directors of FTRY and
FFMA will be immediately informed of the exception and the Director, FTRY will
inform the Director, FFMA of the proposed remedial action.
3.2.2 All exceptions shall be reported to ALCO at the next meeting. For significant
exceptions the Director, FFMA will inform ALCO promptly of such exceptions being
identified. FTRY and FFMA shall explain any exceptions and, if necessary, ALCO
shall decide on any further actions to be taken.
3.2.3 If any officer is aware that a breach of the Guidelines has not been reasonably
addressed in accordance with the previous paragraphs, such officer shall promptly
act to ensure the required dissemination.
3.3.1 FTRY shall be responsible for preparing various regular and ad-hoc reports to
support the Bank’s asset and liability management process.
• Monthly summary of asset and liability management operations and
performance for the Board (to be cleared by ALCO).
• Quarterly reports summarizing the Bank’s asset and liability management
operations and strategy for the Board.
Where ALM trades are recommended by IRWG or CUWG, and endorsed by ALCO, FTRY shall examine
the economic benefits of the alternative implementation strategies and execute the most financially attractive
within the various limitations of the Guidelines. Such transactions shall be completed within twenty business
days of the approval from ALCO and shall be described in the next monthly report from FTRY to ALCO.
• Execution reports on interest rate and currency risk management transactions
undertaken to maintain alignment with the re-pricing profile and currency
• FTRY shall maintain an up-to date list of all front-office staff authorized to
conduct asset and liability management transactions and back-office staff
authorized to settle asset and liability management transactions. Any changes in
the authorized staff shall be subject to the approval of Director, FTRY and
promptly communicated in writing to FFMA. FFMA shall communicate the
updated list of the Bank’s authorized traders to all approved counterparties, at each
instance of a change in the list.
3.3.2 FFMA shall be responsible for preparing various regular and ad-hoc reports to
support the Bank’s asset and liability management process.
• Monthly reports to ALCO on the Bank’s asset and liability management
performance and compliance with the Guidelines126.
• Monthly report to ALCO on any exceptions to the Guidelines and progress on any
• Any changes to the lists of approved counterparties and the exposure limits127.
• An annual report to the Board on the Bank’s exposure to market risk and
compliance with the Guidelines.
3.3.3 The working groups under ALCO shall prepare periodic reports for the committee.
• The IRWG shall submit a quarterly report to ALCO on the Bank’s interest rate
risk profile and proposed corrective measures. It shall submit a semi-annual
report on debt allocation, lending rates, and funding margins.
• The CUWG shall submit a quarterly report to ALCO on the Bank’s currency
risk profile and proposed corrective measures.
• The PJWG shall submit a quarterly report to ALCO on the Bank’s medium-term
financial projections, the liquidity risk profile and the proposed PML and OLL.
The monthly performance and compliance reports shall include the external managers.
Includes all investment, derivative, and trading counterparties.
ASSET AND LIABILITY MANAGEMENT COMMITTEE
ALCO was established in June 1998 by Presidential Instruction PL 006/98 as a
successor to the Investment Committee. It has been subsequently modified by
Presidential Instructions PL 004/02 and PL 001/03. ALCO is composed of a
chairman, a non-voting secretary, plus six voting members.
• Chairman: Vice President, Finance;
• Member and alternate chairman: Director, Financial Control;
• Member: Director, Financial Management;
• Member: Director, Treasury;
• Member: Director, Legal Services and General Counsel;
• Member: Director, Operations Policy;
• Member: Director, Strategic Planning and Budget
• Secretary: Manager, Asset and Liability Management Division;
ALCO’s role is to:
• ensure sound integrated Bank-wide risk management;
• monitor and report on overall Bank financial issues;
• advise the President and provide guidance to the business units
involved in the Bank’s asset and liability management operations;
• set broad guidelines in the areas of risk control, capital allocation,
financial performance, and balance sheet structuring.
ALCO may establish working groups to support the technical aspects of the
Committee’s functions. Currently, seven standing working groups have been
• interest rate risk working group;
• currency risk working group;
• projections working group;
• financial products working group;
• country risk working group;
• credit risk working group;
• operational risk working group.
African Development Bank
The Bank employs a number of reference benchmarks for performance measurement
and risk control. The principal interest rate benchmarks are:
• Net Assets – the standard reference benchmark is a uniform 10-year re-pricing
profile in each of the SDR currencies. In this framework 10% of the Bank’s net
interest sensitive assets re-price in each of the next 10 years. The tenth annual
re-pricing bucket includes all assets re-pricing longer than 10 years.
• Floating Rate Assets and Liabilities - the standard reference benchmark is the
6-month LIBOR rate in each currency resetting with a semi-annual frequency
on the Bank’s standard reset dates of February 1st and August 1st.
• Operational Portfolio - the reference benchmark is the 1-month LIBID rate
(LIBOR minus 12.5 basis points) of the first business day of every month.
• Prudential Portfolio - the reference benchmark is the Bank’s standard reference
for floating rate assets and liabilities in each currency. The 6-month LIBOR
rate is decompounded using an Actual/360 day basis to obtain the daily
benchmark rate and re-compounded on an Actual/365 day basis to obtain the
monthly benchmark rate.
The principal currency benchmark is:
• Net Assets – the standard reference is the currency composition of the SDR.
The SDR is a basket currency composed of 0.5770 USD; 0.4220 EUR; 0.0984
GBP; and 21 JPY. The IMF adjusts the composition of the SDR every five
years. The value of the SDR changes daily as the relative values of the
component currencies fluctuate in the markets.
FFMA is responsible for maintaining and computing the Bank’s benchmarks.
Nigeria Trust Fund
The NTF employs a number of reference benchmarks for investment performance
measurement and risk control. The principal interest rate benchmarks are:
• Investment Portfolio – pending the resolution of the Sunset Clause, the interim
investment risk control benchmark is a single maturity repricing profile aligned
to April 2006, when the Sunset Clause comes into force.
• Operational Portfolio - the reference benchmark is the monthly average of
daily 3-month LIBOR rates.
The Bank regularly revalues its investment and borrowing portfolios as well as all
derivative transactions for the purpose of financial reporting and computing
counterparty exposures. To the extent possible, all valuations should reflect the
estimated price at which a transaction could be liquidated under prevailing market
To the extent possible, all securities held in the Bank’s prudential and operational
investment portfolios, and NTF’s operational portfolio, will be revalued daily using
the closing bid prices or the futures exchange closing for the previous day. The Bank
relies on three principal market pricing sources: Reuters; Bloomberg; and trading
For securities where a market price is not readily available, valuations will be
estimated using the Bank’s internal treasury systems. At the time of purchase of each
new security, front-office and middle-office staff will agree on the appropriate pricing
model to be used.
For securities that are valued internally, prices from a market source will be obtained
at least monthly to validate and recalibrate the Bank’s pricing models. Middle-office
staff will attempt to obtain prices from three different counterparts, including the
underwriter of the security and the trading counterparty, which sold the security. The
valuation price will be the average of the quotes received, excluding any quotes that
significantly deviate from the mean. All investment valuations will be monitored for
reasonableness. Security valuations exhibiting unusual volatility will receive closer
scrutiny by middle-office and front-office staff.
Securities held in the equity-backed portfolio (and the NTF investment portfolio) are
intended to be held to maturity and are valued daily using the constant yield
amortization methodology. For purposes of estimating counterparty exposures, and to
measure the liquidity of the portfolio, market prices are obtained for the equity-
backed portfolio at least monthly.
Although the Bank generally does not “trade” the borrowings in its portfolio, all debt
liabilities and the related derivatives are revalued at least monthly based on prevailing
market conditions. Valuations will be estimated using the Bank’s treasury systems. At
the time of issuance, front-office and middle-office staff will agree on the appropriate
pricing model for each new borrowing.
To ensure proper model calibration at inception, each new transaction will be priced
using the Bank’s models and compared to the price of the lead manager. In addition,
market prices for all new transactions will be obtained monthly for the first 6 months.
For seasoned (older) transactions, prices from a derivative counterparty or an
independent market source will be obtained at least quarterly to validate and
recalibrate the Bank’s pricing models.
The Bank operates its funding activities within a framework of debt limits. The three
principal debt limits are:
• Total debt shall not exceed 80% of the callable capital of member countries.
• Total senior debt shall not exceed 80% of the callable capital of non-borrowing
• Total debt shall not exceed 100% of the Bank’s usable capital128.
Usable capital is the sum of paid-in capital in convertible currencies, reserves, and callable capital of
countries rated AA/Aa2 or better.
Each semester, the debt allocation exercise determines the composition of the USD,
Euro, CHF and JPY borrowing pools funding the Bank’s pool-based loans as well as the
Bank’s average funding margin for market-based loans in the lending currencies. The
IRWG is responsible for proposing the debt allocation and computing the various lending
rates and funding margins for ALCO’s approval.
The base interest rate charged to the borrowers of pool-based loans in any semester is the
average cost of the underlying borrowing pool in the relevant currency, calculated over
the previous semester. Pool-based loans are repriced every January 1 and July 1.
Since the debt allocation exercise entails a degree of Management discretion in seeking
to balance borrowers’ interest as well as shareholders’ interests, the following are used as
guiding principles for pool-based loans:
• Matching principle: The amount of borrowings in each pool will be within a
band of 80% to 120% of the amount of pool-based loans outstanding in the
• Fixed-floating hybrid principle: At least 50% of the borrowings in each pool will
be fixed rate debt.
• Consistency principle: Debt allocations will not be reversed in future periods,
unless the reversal is in order to conform to the first principle i.e. if declining loan
balances require borrowings to be released from the pool.
• Fairness principle: The debt allocation will seek, to the extent feasible, to
equalize the interest costs of the different currency pools relative to the relevant
market interest rates, to ensure fairness across various borrowers.
At the option of the borrower, the lending rate charged to public sector borrowers of
floating rate loans may include a spread to reflect the Bank’s funding margin in that
currency. The Bank’s funding margin in each lending currency shall be estimated each
semester as the difference between the Bank’s current cost of floating rate borrowings
and the benchmark, expressed in basis points.
To monitor the degree of the liquidity in the Bank’s trading portfolios, the Bank’s
investments will be broadly classified according to marketability. The relevant front-
office staff will classify all investments at the time of purchase into one of two
liquidity classes: very liquid and moderately liquid. The liquidity classification of all
securities in the trading portfolios will be reviewed by the middle-office at least
In recognition of the inherently subjective nature of the liquidity assessment of
specific securities, the criterion for classification will be the indicative time required to
sell UA 25 million of the security, under normal business conditions, without a
material impact on the market price.
Liquidity Indicative Liquidation Valuation
Classification Period Features
Daily quotes on
Very Liquid Within 3 business days Bloomberg,
Moderately Liquid Within 10 business days quotes at least once a
The Bank shall conclude ISDA Master Agreements with approved counterparties
before undertaking any derivative transactions. It is expected that there will be
collateral agreements with the Bank’s principal derivative counterparties.
The threshold for transfer of collateral from the counterparty to the Bank shall be
based on the credit rating of the counterparty. The table below sets out the indicative
threshold levels currently applicable; these shall be subject to periodic review based
on the Bank’s experience.
Counterparty Rating Threshold*
AAA** N/A N/A
AA+ 25 5
AA 20 5
AA- 15 5
A+ 0 5
A 0 5
A- 0 5
• Thresholds and minimum transfer amounts expressed in USD Millions
** Excluding SPVs, for whom a threshold of USD 100 million will be applied
The Bank shall conclude ISMA Agreements with all approved counterparties before
undertaking any repo transactions.
The counterparty exposure limits for the various Bank Group entities are based on the
general principle of diversification and limiting the potential adverse impact of a
failure by any single counterparty129 on the entity’s financial soundness.
The Bank’s counterparty limits are linked to the credit rating of the counterparty and
are expressed as a percentage of the lower of either the Bank’s networth (liquid assets
for NTF) or the counterparty’s networth.
The table below presents the current limit structure used to calculate the counterparty
exposure limits for ADB and NTF. In order to cater to technical breaches of a non-
material nature, exposures exceeding but within 105% of limit will not be treated as an
exception, provided the limit is exceeded due to market interest or exchange rate
Percentage of Percentage of NTF’s
ADB’s/Counterpart’s Liquidity/Counterpart’s Net
Net Worth Worth
AAA 8% 10%
AA+ 6% 8%
AA 6% 8%
AA- 6% 8%
A+ 4% 6%
A 4% 6%
A- 4% 6%
AAA ABS/MBS 3% 6%
Each legally separate entity shall be considered as a distinct counterparty; aggregation of exposures
across related entities (such as group companies, subsidiaries) shall be done only if implicit/explicit
cross-guarantees can be established.
INVESTMENT GUIDELINES SUMMARY
Actively Managed Trading Portfolios
Portfolio Parameter Limit
ADB Operational Benchmark 1 month Libid reset each month
Permitted Duration Band 0-2 months
Individual Security/Derivative Plus or minus 1 year
ADB Prudential Benchmark 6 month Libor reset Feb 1 and Aug 1
Permitted Duration Band Plus or minus 6 months around
Individual Security/Derivative Plus or minus 10 years
NTF Operational Benchmark 3 month Libor daily average
Permitted Duration Band 0-12 months
Individual security duration Maximum 12 months
Passively Aligned HTM Portfolios
ADB Equity-backed Portfolio Driven by 10-year uniform repricing profile for net assets
NTF Investment Portfolio Constant maturity to Sunset date in April 2006.
Counterparty Rating Restrictions
Type Minimum Rating Additional limits/Remarks
Trading counterparty A/A2 Maximum settlement period for
non-derivative secondary market
trade of 1 month
Derivative Counterparty AA-
Investment counterparty A See Authorized Investments
Investment Type Minimum Rating* Maturity Limit
Long term Money Market
Government AAA - 30 years
AA- - 15 years
A - 1 year
Agency/Supranational AAA - 30 years
AA - 15 years
A A-1 1 year
Depository Bank AAA - 10 years
AA- A-1 5 years
A A-1 6 months
Corporations AAA 10 years
AA- A-1 5 years
A A-1 6 months
MBS/ABS AAA A-1+ No maturity limit, but
Money Market AA-m -
* Minimum rating may be either a long-term or a money-market rating; investments with only a money-
market rating shall require a minimum issuer rating of A.
Category Limits (percent of portfolio size)
Category Portfolio Limit
Corporations including ADB Operational+Prudential 35%
non-bank Financial NTF Operational
ADB Equity-backed 25%
ABS/MBS ADB Operational+Prudential 35%
ADB Equity-backed 10%