The FSC issued the letter Ref. No. Jin-Guan-Bao-Cai-Zi No. 10502502071 dated 1 July 2016 to interpret Article 2 of the Regulations Governing Derivatives Transactions Conducted by Insurance Companies (the "Regulations"). When an insurance company conducts a multi-currency cross-hedging transaction for multiple currency hedging, it means "the underlying instrument of the hedging derivatives is different from the hedged item" and such insurance company shall comply with the following:
- The insurance company shall incorporate the transaction where the underlying instrument of the hedging derivatives is different from the hedged item into the internal procedures for processing derivatives transactions and such procedures shall be submitted to the FSC for prior approval. Said procedures shall also be approved by the board of directors and the risk management committee of the insurance company and shall be jointly implemented and amended by senior officers and relevant business officers. Besides, certain information shall be incorporated into the procedures. In addition, the insurance company shall report to the board of directors and the risk management committee on a regular basis.
- Before conducting the multi-currency cross-hedging transaction, the underlying instrument of the hedging derivatives and the hedged item shall be specified in a formal document by the insurance company, with a statement certifying the high correlation between them. In addition, the insurance company shall keep a record concerning the methodology or model determining the constitution and proportion of the said instrument and shall comply with it.