Central Bank of Kuwait - Mandates Special Disclosure by Banks on Derivatives

This is a post from over one month ago (November 16 to be precise).  I made a small edit to it today and now it is on today's new posts lists.

About one year ago, Gulf Bank had a major loss arising from foreign currency derivatives undertaken for a customer who refused or was unable to settle.  Market speculation at the time was that the customer may have been a related party.  The loss was KD375 million requiring the recapitalization of the bank, including the Kuwaiti Government taking a 16% stake through KIA.

Today AlQabas reported that  the Central Bank of Kuwait ("CBK") issued instructions to local banks that they were to have their external auditors prepare a special audit report on their dealing in derivatives both for their own as well as customer's accounts. 

As per the press report, the CBK emphasized that the audit work and subsequent report should:

1. Review the sufficiency of the rules/principles of the system of internal control established and followed over this activity and its effectiveness
2. Examine extent of risks the bank might be exposed to, i.e., risk limits
   
3. Disclose the (financial statement) results of the existing position (of derivatives) as of 31 December 2009
4. Contain a statement outlining the development of the sufficiency and effectiveness of internal controls 
5. Compare the above points to the status as of the 31 December 2008 financials

The CBK warned that failure to provide this special report would be treated as a serious matter and would result in delays in the CBK approval of a bank's 2009 annual report.  Apparently the CBK wants to ensure that there are no more unwelcome surprises in the banking sector in 2009.

AlQabas believes that since Gulf Bank's 2008 problem, many local banks have closed their derivative positions or substantially reduced both volumes and riskiness of derivatives traded.