Archived - Exchange Fund Account - Annual Report - December 31, 1999: 2

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Management Responsibility for the Financial Statements

Responsibility for the financial statements of the Exchange Fund Account (the Account) and all other information presented in this Annual Report rests with the Department of Finance. The operation of the Account is governed by the provisions of Part II of the Currency Act. The Account is administered by the Bank of Canada as fiscal agent.

The financial statements were prepared in accordance with the stated accounting policies of the Government of Canada set out in Note 2 to the financial statements. These policies were applied on a basis consistent with that of the preceding year.

The Department of Finance establishes policies for the Account's transactions and investments, and related accounting activities. It also ensures that the Account's activities comply with the statutory authority of the Currency Act.

The Bank of Canada effects transactions for the Account and maintains records, as required to provide reasonable assurance regarding the reliability of the financial statements. The Bank reports to the Department of Finance on the financial position of the Account and on the results of its operations.

The Auditor General of Canada conducts an independent audit of the financial statements of the Account and reports the results of his audit to the Minister of Finance.

The Annual Report of the Account is tabled in Parliament along with the financial statements, which are part of the Public Accounts and are referred to the Standing Committee on Public Accounts for their review.

__________________________
G.G. Thiessen
Governor
Bank of Canada

__________________________
Kevin G. Lynch
Deputy Minister
Department of Finance

__________________________
F.J. Mahoney
Chief Accountant
Bank of Canada

Exchange Fund Account

Balance Sheet

As at December 31, 1999

	1999		1998
	(in millions of dollars)
	US	Canadian	US	Canadian
Assets
Denominated in U.S. dollars
Cash and short-term deposits	$3,575	$5,160	$3,536	$5,422
Marketable securities (Note 4)	11,696	16,881	9,327	14,301
	15,271	22,041	12,863	19,723
Denominated in other foreign currencies
Cash and short-term deposits (Note 5)	24	35	254	390
Marketable securities (Note 5)	5,564	8,030	3,708	5,685
	5,588	8,065	3,962	6,075
Denominated in special drawing rights
Special Drawing Rights (Note 6)	529	764	1,391	2,133
Gold and gold loans (Note 7)	88	127	124	191
	617	891	1,515	2,324
Official international reserve assets	$21,476	$30,997	$18,340	$28,122
Due to the Consolidated Revenue Fund
Advances (Note 8)		$29,062		$26,466
Revenues for the year		1,935		1,656
		$30,997		$28,122

Approved:

__________________________
G.G. Thiessen
Governor
Bank of Canada

__________________________
Kevin G. Lynch
Deputy Minister
Department of Finance

__________________________
F.J. Mahoney
Chief Accountant
Bank of Canada

See accompanying notes to the financial statements

Exchange Fund Account

Statement of Revenue

For The Year Ended December 31, 1999

	1999	1998
	(in millions of Canadian dollars)
Revenue from investments
Marketable securities	$533	$1,364
Cash and short-term deposits	237	257
Special drawing rights	33	69
Gold	14	26
	817	1,716
Other revenue (loss)
Gain on sales of gold	247	253
Net foreign exchange gains (losses)	871	(313)
	1,118	(60)
Net revenue for the year due to theConsolidated Revenue Fund	$1,935	$1,656

See accompanying notes to the financial statements

Exchange Fund Account

Notes to Financial Statements

December 31, 1999

1. Authority and Objective

The Exchange Fund Account (the Account) is governed by Part II of the Currency Act. The Account is in the name of the Minister of Finance and is administered by the Bank of Canada as fiscal agent. The Financial Administration Act does not apply to the Account.

The legislative mandate of the Account is to aid in the control and protection of the external value of the Canadian dollar, and the Minister of Finance acquires or sells for the Account those assets which are deemed appropriate for this purpose in accordance with the Currency Act. The Account is empowered to invest in instruments approved by the Minister of Finance in accordance with the Act.

2. Significant Accounting Policies

Significant accounting policies of the Account are set out below. As required by the Currency Act, they conform to the stated accounting policies used by the Government of Canada to prepare its financial statements.

a) Valuation of assets

The estimated fair market value of cash and short-term deposits, which are generally held to maturity, is deemed to be equal to their book value.

Marketable securities are adjusted for unamortized premiums or discounts, where applicable, and are reported at the lower of their amortized costs including accrued interest and year-end market values. Purchases and sales of securities are recorded at the settlement dates.

Marketable securities, short-term deposits and Special Drawing Rights (SDRs) include accrued interest. The SDR is a unit of account issued by the International Monetary Fund (IMF), and its value is determined in terms of a basket of four major currencies (five for the comparative year).

Gold and gold loans include accrued interest. Gold and gold loans are carried in the Account at a value of 35 SDRs per fine ounce, which conforms to the value used in the Public Accounts of Canada.

b) Revenue from investments

Revenue from investments is recorded on an accrual basis and includes interest earned, amortization of premiums and discounts, gains or losses on sales of securities, and revenues from securities lending activities. Write-downs of securities to their year-end market values (if applicable) are recorded as a charge to investment revenue in the year in which they occur.

c) Gold

Gold sales and net gains on gold sales are recorded at settlement dates. Interest revenue from gold loans is recorded on an accrual basis and is included in revenue. Premiums received on the sales of call options on gold are recorded in revenue.

d) Translation of foreign currencies and SDRs

Assets and liabilities denominated in foreign currencies and SDRs are translated into Canadian and US dollar equivalents at year-end market exchange rates, which were as follows:

	Canadian dollars
	1999	1998
US dollar	1.4433	1.5333
Japanese yen	0.01416	0.01350
German mark	0.7426	0.9191
French franc	0.2214	0.2741
Euro	1.4525	-
Special Drawing Right	1.97869	2.1570

Foreign exchange gains or losses result from the translation of assets and advances denominated in foreign currencies and SDRs, as well as transactions throughout the year. Unrealized foreign exchange gains or losses on short-term currency swap arrangements with the Bank of Canada and on currency hedges are recorded in revenue as Net foreign exchange gains (losses). See also Note 9.

The reported amount at year-end of assets that are hedged against exchange rate fluctuations includes unrealized gains or losses on the translation of the related outstanding hedge contracts. See also Notes 5 and 9.

Investment revenue in foreign currencies and SDRs is translated into Canadian dollars at the foreign exchange rates prevailing on the date the revenue is earned.

e) Disposition of revenues

The revenues for the year are payable to the Consolidated Revenue Fund of the Government of Canada within three months after the end of the year in accordance with the Currency Act.

f) Services received without charge

The Account receives without charge administrative, custodial and fiscal agency services from the Bank of Canada.

g) Interest-free advances

The Account receives interest-free advances from the Consolidated Revenue Fund.

3. Official Government Operations

Official government operations involve purchases and sales of Canadian dollars against foreign currencies. These are undertaken to promote orderly conditions in the market for the Canadian dollar, or to meet net government requirements for foreign exchange. During the year 1999, official international reserves increased by US$ 2,744 million as a result of these operations (versus a decrease of US$ 10,467 million in 1998). None of these transactions during 1999 was aimed at moderating movements in the value of Canadian dollar (compared to the sale of US$ 9,063 million and purchase of US$ 51 million in 1998).

4. Marketable Securities Denominated in US Dollars

		1999		1998
		(in millions of dollars)
Securities	Par value	Amortized cost		Par value	Amortized cost
	US	US	Canadian	US	US	Canadian
US Government	$4,617	$4,736	$6,837	$ 5,482	$5,645	$8,656
US Federal Agencies	3,800	3,762	5,430	1,856	1,855	2,844
Sovereign paper and International Institutions	3,283	3,251	4,692	1,704	1,713	2,626
Accrued interest	-	203	292	-	114	175
	$ 11,700	$ 11,952	$ 17,251	$ 9,042	$ 9,327	$ 14,301
Estimated market value:		$ 11,696	$ 16,881		$ 9,524	$ 14,603

Estimated market values are based on quoted market prices.

At year-end, the value of securities was written down by US$ 256 million (C$ 370 million) from their amortized cost including accrued interest, to reflect the estimated net market value of these assets. A charge of C$ 370 million was made against the investment income for 1999.

Loans of securities are effected on behalf of the Account by agents who guarantee the loans and obtain collateral of equal or greater value from their approved counter-parties in these transactions. At year-end, there were no US Government securities being used in securities lending operations, whereas for 1998 there were US$ 2,350 million (par values) of US Treasury Notes and US$ 425 million of US Treasury Bills being used in securities lending operations with financial institutions. Subsequent to year-end, the Account has resumed securities lending operations.

5. Assets Denominated in Other Foreign Currencies

Cash and Short-term Deposits

	1999		1998
	(in millions of dollars)
	US	Canadian	US	Canadian
Euro	$24	$35	-	-
German marks	-	-	$252	$386
French francs	-	-	1	2
Japanese yen	-	-	1	1
Accrued interest	-	-	-	1
	$24	$35	$254	$390

Marketable Securities

	1999		1998
	(in millions of dollars)
	US	Canadian	US	Canadian
Euro	$5,259	$7,590	-	-
German marks	-	-	$2,747	$4,211
French francs	-	-	715	1,097
Japanese yen	493	711	246	377
Amortized cost at year-end:	$5,752	$8,301	$3,708	$5,685
Estimated market value at year-end:	$5,564	$8,030	$3,864	$5,925

Estimated market values are based on quoted market prices.

At year-end, the value of securities was written down by US$ 188 million (C$ 271 million) from their amortized cost, to reflect the estimated net market value of these assets. A charge of C$ 271 million was made against the investment income for 1999.

6. Special Drawing Rights (SDRs)

	1999		1998
	(in millions of dollars)
	US	Canadian	US	Canadian
Held at the end of the year	$526	$759	$1,384	$2,123
Accrued interest	3	5	7	10
	$529	$764	$1,391	$2,133

7. Gold and Gold Loans

During the year, the Account sold 681,289 fine ounces of gold (600,000 fine ounces in 1998).

	1999		1998
	(in millions of dollars)
	US	Canadian	US	Canadian
Held at the end of the year
Gold loans	$82	$117	$117	$180
Gold	5	8	5	8
Accrued interest on gold loans	1	2	2	3
	$88	$127	$124	$191

The year-end carrying values and market values (based on London fixings) of gold and gold loans, excluding accrued interest, are:

	1999		1998
	Price per fine ounce	Total value in millions	Price per fine ounce	Total value in millions
Carrying value - US	$ 47.98	$ 87	$49.24	$ 122
- Canadian	69.25	125	75.50	188
Market value - US	290.25	524	287.45	715
- Canadian	418.92	756	440.75	1,096

8. Due to the Consolidated Revenue Fund (CRF) - Advances

The Account is funded by advances from the CRF. During the year, these were limited to C$ 35 billion by Order in Council dated February 21, 1997 (revised by Order in Council to C$ 40 billion effective December 30, 1999). At year-end, advances from (deposits with) the CRF consisted of:

	1999	1998
	(in millions of Canadian dollars)
US dollars	$41,686	$45,951
Canadian dollars	(19,598)	(24,340)
German marks	-	3,676
French francs	-	1,096
Euro	7,473	-
Japanese yen	708	-
Special Drawing Rights	(1,207)	83
	$29,062	$ 26,466

The proceeds of Canada's borrowings in foreign currencies and allocations of SDRs by the IMF have been advanced from the CRF to the Account. Subsequent repayments of foreign currency debt are made using the assets of the Account and result in reductions in the level of foreign currency advances. Interest payable by Canada on borrowings in foreign currencies and charges on SDR allocations to Canada are charged directly to the CRF.

Canadian dollar advances are required by the Account for the settlement of its purchases of foreign currencies. Sales of foreign currencies result in receipts of Canadian dollars that are remitted to the CRF, causing reductions in the level of outstanding Canadian dollar advances. Cumulative net sales of foreign currencies can result in overall net deposits of Canadian dollars by the Account with the CRF.

9. Commitments

a) Currency swaps

The Account enters into short-term currency swap arrangements with the Bank of Canada. The objective of these swaps is to assist the Bank in its cash management operations. As part of these agreements, the Account sells US government securities denominated in US dollars for Canadian dollars, with simultaneous agreements to repurchase these securities from the Bank on future dates at the same exchange rates in effect at the time the swaps were entered into. The maximum term of the swaps is equivalent to the term of the underlying securities; however, they are generally reversed earlier based on operational requirements of the Bank.

These swaps result in receipts of Canadian dollars by the Account, which are remitted to the Consolidated Revenue Fund. These transactions are reversed when the swaps are unwound.

At year-end, the Account had commitments to repurchase US dollar securities under swap arrangements with the Bank of Canada of US$ 3,534 million (US$ 2,941 million in 1998). The Canadian dollar equivalent at the year-end exchange rate was $5,101 million ($4,509 million in 1998).

b) Currency hedges and other uncompleted transactions

At year-end, there were no commitments for forward sales and purchases of various currencies, whereas in 1998 there were commitments for net forward sales of 832 million of German marks and 35 billion of Japanese yen against total net forward purchases of US$ 774 million.

c) Gold options and forward contracts

The Minister of Finance has authorized the sale of call options, as well as forward sales, on part of the Account's gold holdings.

Under gold options, the Account receives a premium against commitments to sell gold at predetermined prices. No gold is sold unless the holders of the options exercise their rights by the expiry dates. At year-end, the Account had outstanding commitments to sell 50,000 fine ounces of gold under call option contracts (200,000 fine ounces in 1998) with a potential total value, if the options were exercised, of US$ 14 million (US$ 63 million in 1998). These options mature by the end of the 1st quarter in 2000.

Under forward contracts, the Account is committed to sell gold at predetermined prices on future dates. At year-end, the Account had outstanding commitments to sell 622,000 fine ounces of gold (270,000 fine ounces in 1998) for a total value of US$ 164 million (US$ 82 million in 1998). The dates of these contracts extend until August 31, 2000.

10. Uncertainty Due to the Year 2000 Issue

The Year-2000 computer issue arose chiefly because many date-sensitive automated systems had not been designed to recognize correctly the year 2000. This represented a significant challenge for all organizations. If not addressed properly, the Year-2000 issue could have had an impact on operations and financial reporting, ranging from minor errors to the failures of critical systems. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year-2000 issue that may affect the Account, including those related to customers, suppliers, or other third parties, have been fully resolved.

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