2.6 Foreign Exchange Reserves and Risk Management

The CBRT holds foreign currency reserves in support of a range of objectives that include assisting the government in meeting its FX-denominated domestic and foreign debt obligations, maintaining adequate FX liquidity against external shocks, supporting monetary and exchange rate policies, and enhancing market confidence. The CBRT’s reserve-management implementations are governed by Law No. 1211.

The CBRT Board regulations and decisions regarding gold and FX reserve management issued pursuant to the same act also provide the framework for the reserve management activities. The CBRT’s institutional decision-making framework for reserve management has a three-tier hierarchical structure. Firstly, as the Bank’s top decision-making authority, the Board, approves the “Guidelines for Foreign Exchange Reserve Management” prepared in line with the three priorities cited in the CBRT Law as safety, liquidity and return. With this Guideline, the Board also sets the general investment criteria for reserve management and authorizes the Executive Committee and Governor to make decisions about implementation. Decisions made by the Executive Committee or the Governor, which are based on proposals made by the Foreign Exchange Risk Management and Investment Committee (FXRIC) in accordance with the Guidelines approved by the Board, constitute the second tier of the institutional decision-making process. At this point, a benchmark portfolio that reflects the CBRT’s general risk tolerance and investment strategy is determined and approved. At the end of each year, the FXRIC proposes a benchmark portfolio to be implemented in the following year. This portfolio, which sets out the strategic asset allocation preferences of the CBRT, is submitted to the Executive Committee and becomes effective upon its approval. The third and final tier of the institutional decision-making process is the implementation of reserve management practices within the limits specified by the Guidelines and the benchmark portfolio. Reserve management activities are carried out within an organizational structure based on the segregation of duties principle. Accordingly, the reserve management activities are carried out by the Reserve Management Division; while risk management activities are carried out by the Risk Management Division.

Subject to the objectives and limits set by the Guidelines and the benchmark portfolio, reserve-management operations are conducted through spot and forward FX trading in international markets, forward transactions, other derivative instruments, FX deposit transactions, repo and reverse repo and securities lending transactions.

The CBRT’s gold holdings became 565.1 tons by 29 December 2017 accounting for 21.9 percent of total reserves (Graph 2.6.1). CBRT gold reserves conform to international standards and are managed as per the framework of the provisions and conditions stipulated in the Central Bank Law No.1211 and the Guidelines issued by the CBRT Board. Pursuant to these Guidelines, the Bank may engage in outright trading of gold and conduct gold deposit and gold swap transactions. As per a regulation that has been in effect since October 2011, commercial banks in Turkey have an option to keep a specified portion of their reserve requirements as standard gold according to the ratios determined for types of reserve requirements.

Efforts to control risks that the CBRT may be exposed to during the conduct of its reserve management operations begins with the strategic asset allocation process, as early as when defining the benchmark portfolio. Once the currencies, instruments and maturities to be employed in reserve management have been set, the expected return and the financial risks involved are to a large extent identified. Reflecting the CBRT’s preferences for strategic asset allocation, the benchmark portfolio consists of target currency composition, target maturities and limits of deviation from these targets, maximum permissible transaction limits, the investment universe representing eligible transaction types, and countries and instruments to invest in. When determining the benchmark portfolio, the aim is to generate returns while observing constraints such as protecting capital and ensuring the availability of liquidity but the fundamental aim is the prudent management of the reserves, the country’s national wealth. Having determined the overall permissible risk level within the framework of the CBRT’s risk tolerance by means of the benchmark portfolio, risks are measured, monitored, and reported regularly.

Despite positive developments in global growth throughout 2017, risk appetite in international markets were affected by “Brexit”, rising tensions concerning North Korea, and by advanced economy central banks’ exit strategies from accommodation and influenced the CBRT’s reserve management strategies in 2017. Inasmuch as financial risks remained persistently high last year, the CBRT maintained its conservative approach in reserve management and took all necessary measures to protect its reserves.

To conclude, the CBRT closely monitors the theoretical and technical developments related to reserve and risk management practices in global economic and financial markets and strives to conduct a country implementation observing both the CBRT’s needs and taking into account global developments.

Gold holdings 565.1 tons By 29 December 2017, the gold holdings became 565.1 tons accounting for 21.9 percent of total reserves.

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