Agenda Item 6
IOPC/APR17/6/2
Date
Original
5 April 2017
English
1992 Fund Assembly
1992 Fund Executive Committee
92AES21
92EC68
Supplementary Fund Assembly
SAES5
AMENDMENTS TO FINANCIAL REGULATIONS
Note by the Director
Summary:
The Pound sterling has weakened significantly since the United Kingdom’s decision to
leave the European Union (Brexit). This has raised questions as to whether it would
be advisable for the 1992 Fund to hold some cash balances in major currencies other
than Pound sterling to protect the assets of the 1992 Fund which it holds for meeting
future claims and claims-related expenditure.
Following discussions with the Investment Advisory Body (IAB), the Director considers
that it would be prudent to mitigate the currency risk of the General Fund which is
currently exclusively held in Pounds sterling by also holding other currencies.
In order for the Director to be able to hold another currency to meet claims to mitigate
further depreciation of Pounds sterling, 1992 Fund Financial Regulation 10.4 would
need to be amended.
Action to be
taken:
1992 Fund Assembly
Decide whether to approve the amendments proposed to 1992 Fund Financial
Regulation 10.4(a) as set out in paragraph 3.2 and Annex II.
1
Introduction
1.1
In accordance with the 1992 Fund’s Financial Regulations, Pounds sterling is the accounting
currency.
1.2
Following the United Kingdom’s decision to leave the European Union (Brexit), the Pound sterling
has weakened significantly which has raised questions as to whether it would be advisable to hold
some cash balances in major currencies other than Pound sterling in order to protect the assets of
the 1992 Fund which it holds for meeting future claims and claims-related expenditure.
1.3
The 1992 Fund Assembly will recall that currency exposure arising from major incidents (i.e. above
what is paid by the General Fund) have been hedged in accordance with the IOPC Funds’ Hedging
Policy introduced in 2008 and contained within the IOPC Funds’ Internal Investment Guidelines.
This document therefore deals with the cash assets held in the General Fund.
1.4
The General Fund is used to meet costs and expenses of the administration of the 1992 Fund, any
other expenditure which may be authorised by the Assembly and to make payments in respect of
any one incident up to an aggregate amount of 4 million SDR. The General Fund also includes the
working capital established by the Assembly.

IOPC/APR17/6/2
-22
Considerations by the Investment Advisory Body (IAB)
2.1
Since the October 2016 sessions of the governing bodies, the IAB has been examining the potential
benefits of holding part of the balances in the General Fund in currencies other than Pounds Sterling
as a hedge against future adverse currency volatility. Currency other than Pounds sterling required
for major incidents, i.e. above 4 million SDR (Major Claims Fund), are covered by the Hedging Policy
introduced in 2008 referred to above.
2.2
The Pound sterling has already weakened by 16% against the US Dollar and 10% against the Euro
and the Japanese Yen since the United Kingdom voted for Brexit; and it could become more volatile
as negotiations progress and is at risk of weakening further thereafter.
2.3
The currency charts in Annex I show the movement of sterling against three major currencies which
might be considered as alternatives to Pounds sterling: Euro, Japanese Yen and US Dollar. The
charts cover a twelve-month period up to 31 March 2017 and cover the exchange rate movements
following the Brexit referendum held on 23 June 2016. These currencies have been selected for
consideration as, in the past, most incidents have occurred in the coastal regions of Europe, Japan
and south-east Asia. The IAB’s view is that the US Dollar would be an appropriate additional
currency to diversify into as there is a degree of correlation between the US Dollar and many other
currencies. In addition, interest rate differentials currently benefit the US currency over the yields
of Pounds sterling, Euro and Japanese Yen deposits which are currently negative or flat. The
US Dollar is also the world’s major reserve currency and seen as a safe haven in periods of risk
aversion.
2.4
At the IAB meeting on 16 March 2017, the Director reported that he is to propose that the working
capital of the 1992 Fund be reduced from £22 million to £15 million over a three-year period from
2018-2020. The working capital in the General Fund is held in Pounds sterling and if the 1992 Fund
is to diversify its currency risk, the Director believes that some of the working capital in the General
Fund should be held in another currency, for example in US Dollars. The IAB shared the Director’s
view that the US Dollar, being a reserve currency, was very liquid and easy to manage on a day to
day basis. The US Dollar is also readily held in financial institutions in London and there is a demand
for the US Dollar to be placed on deposit.
2.5
It was recalled that, in order for the Director to be able to hold another currency to meet claims
and claims-related expenses, Financial Regulation 10.4 would need to be amended.
3
Director’s considerations
3.1
As the General Fund is used to provide the first 4 million SDR for any incident, the Director considers
that it would be prudent to cover the currency risk of the General Fund by holding not only Pounds
sterling but also other currencies as appropriate and that some of the working capital be held in
US Dollars, which is an easily convertible currency.
3.2
In order for the Director to be able to hold another currency to meet claims and claims-related
expenses, Financial Regulation 10.4 would need to be amended, specifically 10.4(a) as set out
overleaf.
IOPC/APR17/6/2
-3Regulation 10.4
The assets of the 1992 Fund shall be held and invested by the Director in accordance with Financial
Regulation 10.1 and the following principles:
(a) The 1992 Fund’s assets shall be held in Pounds Sterling or, if the Director considers it
appropriate, in the currencies required in other currencies to meet claims and claims-related
expenses. arising out of a specific incident which have been settled or are likely to be settled in
the near future;
(b-e) No change
These principles shall be reviewed from time to time.
3.3
Annex II sets out Financial Regulation 10.4 in full, including the suggested change to 10.4(a), for
completeness.
4
Action to be taken
The 1992 Fund Assembly is invited to:
(a) take note of the information contained in this document; and
(b) decide whether to approve the amendments proposed to 1992 Fund Financial Regulation
10.4(a) as set out in paragraph 3.2 and Annex II.
***
ANNEX I EXCHANGE RATE MOVEMENTS FOLLOWING THE BREXIT REFERENDUM IOPC Funds 31 March 2017 GBP/USD 12 months GBP/EUR 12 months GBP/JPY 12 months * * * IOPC/APR17/6/2, Annex I, page 1 ANNEX II
REVISED 1992 FUND FINANCIAL REGULATION 10.4
(DRAFT)
The assets of the 1992 Fund shall be held and invested by the Director in accordance with Financial
Regulation 10.1 and the following principles:
(a)
the 1992 Fund's assets shall be held in Pounds Sterling or, if the Director considers it
appropriate, in other currencies to meet claims and claims-related expenses;
(b)
the assets shall be placed on term deposit or by purchase of Certificates of Deposit with
banks or building societies enjoying a high reputation and standing in the financial
community; the term of these investments shall not exceed one year;
(c)
the maximum investment in any bank or building society of the 1992 Fund's assets shall
not normally exceed 25% of these assets or £10 million, whichever is the higher;
(d)
the maximum investment in any bank or building society by the 1992 Fund and the
Supplementary Fund shall not together normally exceed £15 million or £20 million in
respect to the Funds' house bank(s) or not normally exceed £25 million when the two
Funds' combined assets exceed £300 million;
(e)
any exceptions to the normal limit in Financial Regulation 10.4(c) and (d), shall be
reported to the Assembly at its next regular session.
These principles shall be reviewed from time to time.
IOPC/APR17/6/2, Annex II, page 1