Policy to minimize the effect of currency fluctuations on the commitment authority of GCF

The Green Climate Fund (GCF) has developed a policy to protect its commitment authority from foreign exchange (FX) volatility, primarily driven by non-USD denominated promissory notes. The proposed strategy prioritizes natural hedging, followed by the use of derivative financial instruments—specifically FX spot, forward, and swap contracts—to lock in the USD value of future encashments. To implement this, the GCF intends to outsource execution to an external third-party provider and establish a USD 50 million collateral reserve. The policy aims to increase funding predictability and reduce the required size of the FX commitment risk buffer.

• The GCF's commitment authority is significantly exposed to FX risk because a substantial portion of contributions from the first replenishment are non-USD promissory notes (PNs) with encashment schedules often spanning nine years.
• The proposed hedging strategy follows a hierarchy: first utilizing natural hedging (matching currency inflows and outflows), and then using derivatives to hedge the remaining net exposure.
• The policy specifies hedging limits: up to 100 per cent for cash contributions received using FX spot contracts, and up to 75 per cent for deposited PNs arising in the next three years using FX forward and swap contracts.
• To manage potential collateral requirements for derivative contracts, the GCF will establish a collateral reserve of USD 50 million, funded from its commitment authority.
• The GCF will outsource the execution and management of FX hedges to an external third-party provider, as the Secretariat currently lacks the necessary IT infrastructure, resources, and governance for direct execution.
• Implementing the hedging policy is expected to reduce the required FX commitment risk buffer; for every USD 100 million hedged, the buffer requirement would decrease by USD 20 million.
• The GCF will restrict trading to counterparties with investment-grade credit ratings (BBB- or above for long-term exposures and A3 or above for short-term exposures) and use ISDA Master Agreements.
• The Board is requested to approve an additional administrative budget of USD 585,000 for 2022 and 2023 to cover legal and outsourcing fees associated with the policy's implementation.

APA

Green Climate Fund (2022). Policy to minimize the effect of currency fluctuations on the commitment authority of GCF. https://www.greenclimate.fund/sites/default/files/document/gcf-b34-13.pdf

Chicago

Green Climate Fund. Policy to minimize the effect of currency fluctuations on the commitment authority of GCF. 2022. https://www.greenclimate.fund/sites/default/files/document/gcf-b34-13.pdf.

Wikipedia

{{cite report |author=Green Climate Fund |title=Policy to minimize the effect of currency fluctuations on the commitment authority of GCF |date=26 September 2022 |url=https://www.greenclimate.fund/sites/default/files/document/gcf-b34-13.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{greenclimatefund2022policy, author = {{Green Climate Fund}}, title = {{Policy to minimize the effect of currency fluctuations on the commitment authority of GCF}}, institution = {Green Climate Fund}, year = {2022}, month = sep, url = {https://www.greenclimate.fund/sites/default/files/document/gcf-b34-13.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }