Reducing red tape in the APS

Appendix 1: Review of foreign exchange reporting

This appendix outlines a review of foreign exchange (forex) reporting requirements undertaken by Finance in the context of the 2006–07 Budget. Although the review predates the framework documented in this report, it reinforces the importance of timely re-evaluation of requirements. The review also illustrates how a better understanding of the issue of concern, and changes in behaviour, can render requirements inappropriate over time.

The issue

The Australian Government identified the need to monitor the implications of forex exposures for the Budget, and to promote effective management of forex risks.

The issue was examined in Australian National Audit Office Report No. 45, 1999–2000: Commonwealth Foreign Exchange Risk Management Practices. The report recommended, among other things, that Finance determine and promulgate an overarching position statement on forex risk management to all agencies subject to the FMA Act.

The initial response

In May 2002, the Government announced the implementation of a forex risk management framework, with effect from 1 July 2002. The framework required FMA Act agencies and Commonwealth Authorities and Companies Act 1997 bodies in the General Government Sector, collectively referred to as ‘entities’, to record and report on forex to Finance. In turn, Finance would report to the Expenditure Review Committee (ERC), in the Budget context, on actual and estimated forex gains, losses and exposures, and the outcomes of the department’s reviews of entities’ forex risk management practices.

The framework reflected a decision to self-insure forex exposures, and not accept the additional costs associated with hedging. The framework involved, among other things:

a prohibition on hedging (unless exempted under the policy)
entities reporting forex exposures, gains and losses to Finance
entities meeting certain criteria (e.g. those with gains or losses above a threshold) being eligible to be supplemented for any forex loss and required to return any forex gain
Finance reporting to the ERC during the Budget process on forex losses and gains by entities, estimated funding adjustments and risk management practices.

Experience in administering the requirement

The reporting showed that forex exposures were very concentrated, with most entities not having material forex exposures. In 2005–06, 96 per cent of the total forex exposures were within eight entities. Moreover, there was little volatility in the exposures of those entities and, based on budgeted forecasts, little volatility was expected.

Outcomes of a review of the requirements

In the light of experience, Finance reviewed the requirements associated with the forex risk management policy (particularly reporting requirements) in the context of the 2006–07 Budget.

The review found that the vast majority of losses and gains reported by entities did not have additional financial implications for either the entity or the Budget. This was because they did not meet the threshold for supplementation of losses or return of gains. After consultation with relevant entities, Finance concluded that the administrative costs of across-the-board reporting by entities outweighed the benefits of the high level of transparency and accountability that it promoted. There was scope to streamline entities’ reporting requirements.

The requirement for all entities to report to the ERC on forex exposures, gains, losses and risk management practices was also re-evaluated. Finance observed that the reporting was for information only. This was because the forex policy provides for automatic returns of gains, and supplementation of losses, provided entities have complied with Finance’s Guidelines for the Management of Foreign Exchange Risk (2002). Accordingly, and as forex policy had operated effectively for three years, reporting to the ERC was judged to be excessive.

Changes flowing from the review

The administrative requirements were revised to simplify the forex reporting and recordkeeping arrangements. The revised arrangements provide a flexible and focused approach to reporting by agencies, with reporting being mandatory for only those few entities with a significant exposure. These arrangements also involve the Minister for Finance and Administration providing a report on forex issues only to key ministers.

The revised forex reporting requirements do not represent a change in the Australian Government’s forex risk management policy. Rather, the changes recognise that the existing policy can be implemented with less red tape. Following the review, the forex risk management policy involves:

a continuing prohibition on hedging (unless exempted under the policy)
the Minister for Finance and Administration providing a report to the Prime Minister and the Treasurer sufficiently in advance of the ERC each year to enable any issue to be raised in that context
all entities, except those with typically significant exposures, being able to elect to opt out of requirements to report forex to Finance and budget adjustment arrangements (collectively referred to as ‘the arrangements’), provided specific requirements are met
entities that opt out of the arrangements being able to opt back in for future forex commitments, provided specific requirements are met
for entities that choose to remain subject to the arrangements, requiring only thosethat meet the thresholds for budget adjustments to report to Finance (other entitiesare required to maintain records in order to self-assess whether they meet the threshold)
for the same entities, the Minister being able to specify transactions that do not need to be reported or recorded.

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