Patrick El Hajj, CFA

Head of Investment Division

Foreign Exchange & Int. operations Department

Summer 2017

Role of the Central Bank

1. Currency issuance: The Central Bank prints and issues notes and coins.

2. Banker to the banks: It provides a payment system for the transactions between banks and intraday liquidity.

3. Banker to the government.

4. Banking supervision : The Central Bank regulates the banking system to seek to maintain financial stability. (Compliance Department , Legal Department ,Banking Control Commission, Special Investigation Commission, Capital Market Authority)

5. Maintains financial stability: The Central Bank is the

Lender of last resort. It provides emergency liquidity assistance to financial institutions that might otherwise collapse, damaging the economy as a whole.

6. Monetary policy function: increasing and decreasing the

money supply by using 3 tools : Interest rate, open market operations and reserve requirement ratio.

7. Reserve Management: The Central Bank manages the portfolio of foreign exchange reserves of the country and may buy or sell them to influence the exchange rate (Intervention).

Role of the Central Bank

Foreign Exchange & International Operations Department

We have 5 divisions in the Department:

1. The Transfer Division

2. The Documentary Credit Division- LC

3. The Back Office

4. The Dealing Room

5. The Communication Division (SWIFT: Society for Worldwide

Interbank Financial Telecommunication)

Foreign Exchange & International Operations Department

Back Office Division

A - Cross Border Transfers in Both Directions

1. Inflows 2. Outflows

B - Swift Preparations

1. Payment orders 2. Confirmations

C - Accounting

Correspondents

Country Banque Du Liban Audi Bank Byblos BankUSD USA Federal Reserve Bank of NY/ Standard Chartered Bank NY Bank of New York Mellon,NY CitiBank NY

EURO EUROPE Banque De France , Paris Deutsche Bank Frankfurt Credit Agricole Paris

JPY JAPAN Bank of Japan ,Tokyo Sumitomo Bank ,Tokyo Bank of Tokyo Mitsubishi, Tokyo

GBP UK Bank of England Barclays Bank , London Standard Chartered Bank ,LondonCo

rre

sp

on

de

nt

Cross Border Transfers - Outflows

Byblos Bank sends a request to BDL to transfer USD 4.5 Millions from his account with BDL to his account with Citibank New York, NY (Byblos Bank account at BDL is Debited by USD 4.5 Millions)

Byblos Bank BDL

Citibank NY, USA Standard Chartered

Bank NY ,USA

MT 200 ( Request to transfer

funds for own accounts )

Transfer USD 4.5 Millions Beneficiary Byblos Bank

MT 202 (Financial institutions transfer ) Transfer USD 4.5 Millions to Citibank NY ,

beneficiary Byblos Bank

MT 910 (Confirmation of Credit )

Cross Border Transfers - Inflows

Audi Bank sends a notice to receive to BDL informing him that he will receive USD 20 Millions at his account with the Fed NY from the Bank of New York, NY US (Audi Bank account at BDL is credited by USD 20 Millions)

Audi Bank BDL

Bank of New York Mellon , NY US

Fed NY

MT 210 ( Notice to Receive) USD 20 Millions

Transfer USD 20 Millions Beneficiary Banque Du Liban

MT 910 (Confirmation of Credit )

MT 202 (Financial institutions transfer )

Transfer USD 20 Millions to the Federal Reserve Bank

of NY , beneficiary Banque Du Liban

International Reserves Assets

FX Reserves : These are assets of the central bank held in different reserve currencies, mostly the US Dollar, and to a lesser extent the euro, the UK pound, the Japanese yen and other foreign currencies. ( Total = 11.098 Trillion USD )

Gold Reserves (Total = 1073.82 Million Troy Oz )

BDL Gross FX Reserves is around 41 Billion US Dollars.

Gold Reserve 9.22 Million Oz (Ranked 15th with around 0.86 % of the World Gold Reserves )

International Reserve Assets Composition

64%

19.7%

4.2%

4.4% 2%

1.8% 0.2%

2.5%

Structure of Currencies in the Global Reserves – Dec 2016

USD EUR JPY GBP CAD AUD CHF Other

261.5

108.7

78.8 78.3

59.2 54.2

33.4 24.6 19.7 17.9 14.2 12.3 10.4 10.0 9.2

0

50

100

150

200

250

300

Official Gold Reserves by millions of Troy Ounces

4.11

2.17

1.35

1.31

1.19

1.18

1.17

1.06

0.83

0.68

0.65

0.58

0.52

0.42

0.38

0.34

0.33

0.33

0.24

0.20

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Switzerland

Lebanon

Germany

Italy

France

Portugal

Netherlands

Austria

USA

Kuwait

Belgium

Libya

Cyprus

Sweden

Denmark

KSA

Greece

Russia

Venezuela

Turkey

Official Gold Reserves Per Capita Holdings

Foreign Exchange Reserves

3054

1189

702

490 440 400 368 367 358 327 258 176 166 139 120 119 107 106 95 87 86 76 72 64 41 40

0

500

1000

1500

2000

2500

3000

3500

Why Do Countries Hold Reserves?

Exchange rate targeting : Ex: Lebanon and Switzerland The Central Bank of Lebanon has set a range for the LBP 1501-1514 .The

USD/LBP exchange rate has been trading within that range since 9-9-1999.

Whereas the Swiss National Bank has set a floor for the EUR/CHF at 1.20 on the 6th of September 2011 and removed it on the 14th of Jan 2015.

Exchange rate stability: Central Banks could intervene to reduce the volatility

in the FX market.

Store of national wealth Sovereign rating :The higher the FX reserve the better the sovereign rating

of a country the lower the borrowing cost.(Lebanon 10 years USD borrowing cost around 6.5%)

Used to avoid financial crises : The Central Bank can use its reserves in time of crisis to pump liquidity into the market. (Ex: China & KSA)

China Foreign Exchange Reserve

2014 Peak USD 4 Trillion

Russia Foreign Exchange Reserve

Kingdom of Saudi Arabia Foreign Exchange Reserve

Peak Aug 2014 around

USD 730 Billion

Switzerland Foreign Exchange Reserve

BDL's Foreign Exchange Reserves

EUR/CHF - Sep 2011 vs. Jan 2015

0

500

1,000

1,500

2,000

2,500

3,000

198

3010

319

86

052

219

86

1110

198

7051

119

871

124

198

80

620

198

90

110

198

90

929

199

00

522

199

1010

419

910

723

199

2020

319

920

828

199

3031

219

931

00

119

94

04

1819

94

110

219

950

529

199

5121

119

96

070

419

970

114

199

708

04

199

80

213

199

80

90

319

99

031

719

99

09

2820

00

04

1220

00

1027

200

1052

420

011

203

200

206

2420

030

107

200

3072

820

04

021

220

04

08

2520

050

317

200

510

03

200

60

420

200

610

3120

070

518

200

7112

620

08

06

1820

09

010

820

09

072

420

100

205

2010

08

1920

110

309

2011

09

2220

120

410

2012

1019

2013

051

320

1311

2620

140

612

USD/LBP Graph 1983 - 2017

Dealing Room

Types of Traders

Forex Traders

Money Market Traders (< 1 year )

Capital Market Traders ( > 1 year )

Equity traders

Fixed Income Traders

Commodities Traders

Derivative Traders

Options Traders

Swap Options Traders

Future Traders

Etc……

BDL Foreign Reserve Currency Composition

U.S. Dollar (More than 80%)

EURO

Pound / Sterling

Japanese Yen

Swiss Francs

Other Arab Currencies

Foreign Reserve Composition

Net Reserve (BDL own funds )

Local Banks Deposits ( RR or Excess Reserves) Ex: Local banks place term deposits at the central bank to cover their 15 % RR in USD )

International Central Banks Deposits Ex: Arab Central Banks

Certificate of Deposits issued by BDL

Other Liabilities

Where Do We Invest Our Reserves (USD 41 Billion)?

Reserve managers main objectives is capital preservation and liquidity, however lately a higher emphasis on returns has been observed .

The strategic asset allocation is decided on the investment committee levels.

A certain amount is kept with our correspondents to cover our liquidity needs and the rest is managed on a daily basis ( Working Capital Tranche) .

Placements with investment grade banks and Central Banks . A portion of our reserve is invested with a list of investment grades commercial banks selected by our Risk Department . The investments are made for different time periods going from one day up to 3 years depending on our liquidity needs and market expectations.

Treasury bills, notes and bonds (AA rated Countries and above ).

Commercial papers (Supranational institutions & agencies AAA rated).

Lebanese Republic Eurobonds.

Working Capital

Short-Term Tranche

Medium-Term Tranche

Long-Term Tranche

BDL Foreign Exchange Reserve Portfolio

Central Banks Asset Classes

0

10

20

30

40

50

60

70

80

90

The higher the risk the higher the return

Type of Instruments

BDL Investments:

Time deposits

Certificate of Deposits

Euro Commercial Papers -ECP

Supranational institutions Bills & Notes

Government Guaranteed Agencies Bills and Notes

Treasury Bills, Notes , Bonds

All our investments are made on Reuters dealing 3000 and Bloomberg, which are systems that link all the treasury desks around the world together.

Reuters Dealing and Bloomberg Terminals

Time Deposit Investments

Overnight Deposit

Overnight placement with the Fed (RRP )

Overnight placement with our correspondents

A Time Deposit (TD) is a type of savings account that earns a fixed interest rate upon reaching maturity. Funds in a time deposit cannot be withdrawn during the term of the maturity ( These type of deals are done on the Reuters dealing system)

Kingdom of Belgium ECP

ISIN : International securities identification number

CUSIP : Committee on uniform securities identification procedures

Supranational Euro Commercial Papers

19,417

11,795

4,841

3,423

2,497 2,454 2,420 2,141 1,807 1,600 1,561 1,498 1,360 1,232 1,021 987 794 763

0

5,000

10,000

15,000

20,000

25,000

World Biggest Economies - USD Billion

IMF 2017 projection

Percentage of World GDP

Diversification

Holland

Sweden

Canada Austria

Belgium

Spain

Finland

Denmark

Australia

France

USA

Japan

Germany

Norway

United Kingdom

Switzerland Singapore

-0.75%

-0.50%

-0.40%

0.10%

0.20% 0.25%

0.50% 0.50%

0.90%

1.25%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

Lowest Central Bank Rates

5.25% 5.63%

6.25% 6.25% 6.50%

7.00% 7.00%

8.00%

9.00%

10.25%

12.50%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Iceland Indonesia India Colombia Vietnam Mexico South Africa Turkey Russia Brazil Ukraine

Highest Central Bank Rates

Lower credit rating , higher risk , higher return

Fixed Income Investments – USA

European Sovereign Securities

1. Gross domestic product (GDP) : it is the market value of all officially recognized

final goods and services produced within a country in a given period of time. (Released 30 days after the quarter ends)

2. US Initial Jobless Claims SA : Weekly initial jobless claims are the actual number of people who have filed for

unemployment benefits for the first time. (Released weekly)

3. Nonfarm payroll – Unemployment Indicator : A measure of the total number of persons employed in nonagricultural sectors

of the economy. (Released 1st Friday of the month)

4. Consumer Price Index – CPI – Inflation Indicator It is a price measures for tracking the price of a market basket of goods and

services purchased by individuals. The weights of the components are based on consumer spending patterns.

(Released 15 days after the end of the month)

Top Economic Indicators

5.Producer Price Index- PPI- Inflation Indicator

Measures prices received by producers at the first commercial sale.

(Released 17 days after the end of the month)

6. Industrial Production

Industrial production is the measure of physical output in factories, mines and utilities. Activity in manufacturing accounts for about 85% of total industrial production with the remainder of output from utilities and services.

(Released 16 days after the end of the month)

7. Retail sales

The report details the dollar value of purchases made at retail stores. (Example: Auto dealers, department stores, etc…)

(Released 14 days after the end of the month)

Top Economic Indicators

8. Trade Balance

Surplus and deficits in trade reflect the competitiveness of a nation’s economy, which in turn indicates demand for a country’s currency.

(Released 40 days after the end of month) 9. Purchasing Manager Index – PMI

Is an economic indicator derived from monthly surveys of private sector companies. An index reading of 50.0 means that the variable is unchanged, a number over 50.0 indicates an improvement while anything below 50.0 suggests a decline. The further away from 50.0 the index is, the stronger the change over the month. (Released first business day after the end of month)

10. Open Market Committee decision The Federal OMC is the Federal Reserve committee that makes key decisions

about interest rates and the growth of the United States money supply.

Top Economic Indicators

Economic Indicators - USA

Economic Indicators - Eurozone

World Interest Rate Probability

The Foreign Exchange Market

Forex or Foreign exchange is the simultaneous buying of one currency and the selling of another.

The Forex market has more buyers and sellers and daily volume than any other market in the world and takes place in major financial institution across the globe. According to the Bank of International Settlement, daily turnover in 2010 was about $4 Trillion.

In Forex, we have: Spot transactions Forward transactions FX SWAPs transactions Options transactions.

Forex Market and Locations

Frankfurt : Opens 09:00 AM Till 05:00 PM

London : Opens 10:00 AM Till 06:00 PM

New York : Opens 03:00 PM Till 11:00 PM

Sydney : Opens 01:00 AM Till 09:00 PM

Tokyo : Opens 02:00 AM Till 10:00 AM

Base Currency vs. Quoted or Variable Currency

The exchange rate is the price at which one unit of the base currency can be bought or sold, in terms of a number of units of the quoted currency.

Currencies are quoted in pairs. By convention the first

listed currency is known as the base currency and the second is called the quoted currency. X/Y X is the base currency Y is the quoted currency EUR/USD 1.0910 means that 1 Euro equals 1.0910 USD USD/JPY 120.08 means that 1 USD equals 120.08 JPY

Exceptions to The USD as The Base Currency

In most FX quotes, the USD is the base currency, with the other currency therefore assuming the status of the quoted currency. However there are exceptions to this Rule.

EUR/USD GBP/USD AUD/ USD NZD/USD EUR, GBP, AUD, NZD are base currencies when paired with the USD.

Cross currency pairs are pairs which do not involve the USD for example EUR/GBP EUR/JPY GBP/JPY EUR/CHF

EUR=Euro, GBP=Pound, CHF= Swiss Franc, JPY=Yen, AUD=Aussie $

Quoting Conventions

Like all financial products, Forex quotes include “Bid “and “Ask “ Bid : Offer to buy the base currency Ask : Offer to sell the base currency

Ask price is always higher than the Bid price The market maker buy the base currency at the Bid price and Sell it

at the Ask price. Buy it at the lower price and sell it at the higher price and lock in the spread as profit .

Traders buy the base currency at (the higher) Ask price and Sell it at

(the lower) Bid price. For example, EUR/USD may Bid at 1.0950 & Ask at 1.0953, this 3

pip spread defines the traders cost and the market maker profit.

Quoting Conventions

Currencies are quoted using five significant numbers, with the last placeholder called a point or a pip (price interest point)

The profit and loss generated from a 1 PIP change depends on the volume of the trade

For example a EUR/USD quotes 1.0910/1.0913

Dealer A bought 1,000,000 euro @1.0913 and sold it @ 1.0910 calculate the loss incurred.

Method 1 - (1,000,000/10,000)x( 1.0913-1.0910) = $100 x 3 pip = $ 300.

Method 2- Buy 1 Mio Euro at 1.0913 = 1,091,300 USD

Sell 1 Mio Euro at 1.0910 = 1,091,000 USD Loss = $ 1,091,300 - $ 1,091,000 = $ 300

What Happens When The Exchange Rate Moves?

The reason why it is important for you to understand which is the “Base Currency “ and which is the “ quoted currency “ ( variable) currency in any given pair, is that it allows you to see the relative value of one currency against another.

Moves up

The base currency is getting stronger against the quoted (variable) currency which is getting weaker.

Moves down

The base currency is getting weaker against the quoted (variable) currency, which is getting stronger.

GBP/USD

USD/JPY

EUR/USD: 1.0900/1.0904

Given a base currency amount ----- Multiply by the (BID) exchange rate to calculate the quoted currency equivalent.

1 million Euros is equivalent to €1,000,000x 1.0900 =

1,090,000 USD Given a quoted currency amount ---- divide by the

(ASK )exchange rate to calculate the base currency equivalent.

1 million USD is equivalent to USD 1,000,000/1.0904 =

Euro 917,094

EUR/USD

The World’s Biggest Rogue Traders in Recent History

Jerome Kerviel - Societe General Paris Loss $7.2 billion

In 2008, Societe General Paris "rogue trader" Kerviel lost the French bank approximately $7.2 billion through arbitrage of equity derivatives from unauthorized trades.

In October 2010, he was sentenced to 3 years in prison. He spent 5 years in prison & was released in sept 2014 with an electronic bracelet.

Kweku Adoboli UBS London Loss $ 2.3 billion

In September 2011, UBS revealed an unexpected $ 2.3 billion loss believed to be caused by a rogue trader in the banks London office. Kweku Adoboli, 31 yrs old.

Jailed in November 2012,

released in June 2015.

Shortly after the massive trading loss was discovered, the Swiss Bank’s CEO Oswald Grubel resigned from his post.

Nick Leeson - Barings Bank GBP 827 Million

Nick Leeson. He was employed by Barings Bank as a trader in the early 1990′s. As a trader he was responsible for bankrupting Barings Bank in 1995, a 233 year old bank , known as the Queen of England bank, with losses of $1.3 billion.

He was sentenced for 6.5 years in Singapore.

He now lives in Ireland and is a professional speaker.

Greatest Traders in the World

Richard J. Dennis, a commodities speculator once known as the "Prince of the Pit," was born in Chicago, in January, 1949. In the early 1970s, he borrowed $1,600 and reportedly made $200 million in about ten years.

Denis believed trading could be thought. To settle a debate on that point with William Eckhardt, a friend and fellow trader, Dennis recruited and trained 21 men and two women, in two groups, one from December 1983, and the other from December 1984. Dennis trained this group, known as Turtles, for only two weeks. He gave few of them accounts ranging from 250,000 to 2 Million USD.

When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million.

George Soros - Net worth $ 24 billion

George Soros born August 12, 1930, is a Hungarian-American investor, and philanthropist. He is the chairman of Soros Fund Management. He is known as "The Man Who Broke the Bank of England" because of his $1 billion in investment profits during the 1992 Black Wednesday UK currency crisis when Britain was kicked out of the ERM - Exchange Rate Mechanism.

Ranked by Forbes as the 7th richest man in America.

GBP/USD 1991 - 1995

The Richest People in Finance

Bloomberg Billionaires Index

The End

Sources:

Bloomberg

Reuters

World bank

Bank of International Settlement