Guidelines & Procedures
Derivatives Policy Guidelines
(The board of governors approved policy can be found at http://www.usask.ca/university_secretary/policies/index.php)
The purpose of the Policy is to provide a framework for the use of derivative instruments in the management of foreign currency, interest rate and natural gas price risks within levels acceptable to the Board of Governors.
Risk Management Objectives
- To ensure
the operating budget is not affected by adverse movements in prices or interest
- Financial exposure management practices are
solely for the purpose of reducing risk; positions will not be taken for
speculation or profit.
Sources of Risk
Foreign Exchange Exposure
Gains or losses can
occur from changes in foreign exchange rates from the time a transaction is
contemplated to when the transaction is settled. For every $1 million in net foreign exchange
exposure, a $.01 change in the exchange rate will affect annual expenses by $10,000. The University has an exposure of between $2
and $3 million in annual net foreign exchange exposure.
Interest Rate Exposure
risk exists wherever there is a mismatch in the term of the debt used to
finance long-term investments and the economic life of the investment. Underlying this risk is the liquidity risk in
the markets being used to seek financing.
For every $10 million of debt held in a year, a 1.0% change in the
interest rate will affect annual interest expense by $100,000. The University has an exposure of
approximately $30 million in interest rate exposure.
Natural Gas Price Exposure
There is a risk
that the market price of natural gas will fluctuate and that the natural gas
costs will rise above the budgeted rate.
A $1.00 change in the market price of natural gas affects the annual
operating budget by approximately $700,000.
Counterparty Credit Risk
Risk of financial
loss can occur due to the financial failure of counterparties.
Risk Management Approach
- Foreign Exchange
- The University will employ a zero cost program utilizing forward contracts
or offsetting options when it is highly probable a foreign currency
transaction, above the thresholds below, will occur. Amounts below the threshold levels are
managed by netting foreign currency revenues against expenses.
- Threshold levels above which a foreign currency exposure requires
- Single foreign currency transactions exceeding Canadian $250,000.
- Monthly net exposure exceeding Canadian $250,000.
- Interest Rate
- The University will
use interest rate swaps to mitigate the risk of rising interest rates and to
reduce borrowing costs when it is highly probably borrowing will occur.
- The financial analysis of the project being funded will include a
determination of the notional value of any derivatives required.
- Natural Gas (NG)
- In order to provide
stability and predictability in natural gas costs, the following guideline is
to be followed when purchasing natural
are defined in gas years which run from November 1st to October 31st. Year 1 is defined as the next gas year, with
the current gas year being Year 0.
volumes purchased in each year will be based on an estimated quantity of
gigajoules required in that year, net of inventory.
levels are to be managed such that we can cover daily usage as a lower limit
and remain within a reasonable range of our contracted capacity as an upper
Permitted Derivative Instruments and Strategies
* Foreign currency caps & floors
Certain derivative transactions
are prohibited. Prohibited transactions include,
but are not limited to:
- Trading for personal gain.
- Speculative trading or creating a portfolio with leverage.
- Counterparties must have at a minimum an investment grade credit rating as determined by a recognized credit rating agency. Recognized credit rating agencies include Dominion Bond Rating Agency (DBRS), Moody Investment Services or Standard and Poors.
In the event a counterparty rating drops below the minimum credit rating, a report will be given to the appropriate Associate Vice-President recommending an appropriate course of action.
- Contracts less than 5 years - a minimum credit rating of BBB
- Contracts greater than 5 years - a minimum credit rating of A
- An International Swap and Derivatives Association (ISDA) or comparable contract must be in place with the counterparty.
Documentation and Confirmation Requirements
- All transactions must be
verified by written confirmation from the dealer outlining the terms and
conditions of executed transactions.
- Counterparty confirmations are
sent to and reviewed by persons independent of the person initiating the
- All agreements, confirmations
or other documents related to the derivative instrument require written
authorization by two (2) authorized signing officers in accordance with the
Signing Authority Policies.
- Documentation supporting the
details of the derivative contract will be attached to the initiating document (e.g.
- Quarterly reports will be
submitted to Financial Reporting summarizing all outstanding derivative contracts
as of the last business day of the quarter.
The reports will use current market values as determined internally. This will be used for interim financial
- Annual reports will be
submitted to the Vice-President (Finance and Resources) summarizing all
outstanding derivative transactions as of the last business day of the fiscal
year. The report will use market values that
are independently verified.
- Annual reports will be
submitted to the Vice-President (Finance and Resources) evaluating transactions
executed under the derivative contract completed during the fiscal year as
compared to cash market rates.
- An annual report summarizing the cost and
effectiveness of the derivatives will be provided to the Board of Governors as
part of the year end reporting schedule.
of derivative usage is the responsibility of the office of the Vice-President
Finance and Resources within policies approved by the Board of Governors.
- Day to day operation, execution, implementation, managing and monitoring of foreign exchange and interest rate derivatives.
- Segregation of duties - written dealer confirmations are independently reviewed
- Day to day operation, execution, implementation, managing and monitoring of natural gas derivatives.
- Segregation of duties - written dealer confirmations are independently reviewed.
- Perform audits on an as-required basis.
- Investigate complaints of financial irregularities.
For questions about specific issues, call the following offices:
|Foreign Exchange Rates
||The risk that a counterparty will not pay an amount due as called for in the original agreement, and may eventually default on on obligation.
||The other party to a derivative contract.
Financial instruments or other contracts with all of the following
- Value changes in response to a change in a specified
- Requires little or not initial net investment
- Is settled at a future date
agreement to buy and sell the Underlying Interest of the agreement at a
designated future date at a price established or determinable by reference to
type of forward contract trading on an organized exchange. The futures contract is an agreement to buy
or sell a specific amount of a financial instrument or commodity at a
designated price at a stipulated time.
agreement or contract which includes a financial instrument considered a
derivative under accounting regulations.
|Interest Rate Swap
agreement to exchange floating interest payment for fixed interest payments, or
the reverse, based on a predetermined notional amount and term.
Long Term Debt rating awarded by rating agencies:
Standard & Poors - BBB
Moody's - Baa2
Dominion Bond Rating - BBB (mid)
||The International Swap and Derivatives Association, Inc.
relatively small change in the amount or price of the Underlying Interest of the
Derivative will have a proportionally larger change on the current market values
of such Derivative.
quoted price of a Derivative traded on a recognized market or exchange and, for
Derivatives not traded on a recognized market or exchange, the amount that a
buyer would pay or be paid by an arm’s-length third party to have the
Derivative assigned to such party.
agreement providing the holder the right, but not the obligation, to purchase
or sell a specified quantity of the underlying interest of the agreement at a
price and at a time established or determinable by reference to the agreement.
agreement for the periodic exchange of payments between two counterparties for
a specified period of time based on notional principle.
securities, financial instruments, currencies, interest rates, foreign exchange
rates, commodities, or other benchmarks of any kind on which the market price,
value or payment obligations of a Derivative are derived or based.