Académique Documents
Professionnel Documents
Culture Documents
Table of Contents
1. Introduction ................................................................................................... 3
1.1 Controlling Risk in Todays Environment................................................................................. 3
1.2 How Adoption of FXall Promotes Best Practice ....................................................................... 4
1.3 Summary of Key Operational & Compliance Benefits from using FXall.................................... 6
1. Introduction
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed
internal procedures, people, and systems, or from external events.1 Foreign Exchange
Committee, March 2003
Although thousands of dealers, in centres all over the world, are conducting their daily
business in a highly professional way and under the highest ethical standards, the
fraudulent actions of these individualshave cast a dark cloud over the entire industry.
ACI. From a statement to the press, 24th November 2003
Focus: Is there an honest man on Wall Street? FBI agents arrested 48 New York
currency traders last week in the lastest scandal to rock the financial world The Times,
London, 23rd November 2003
John McCarthy, director of foreign exchange trading at ING Capital Markets in New York
and a 24-year veteran of the industry, said, "In the long run, the foreign-exchange
market crosses every border and, as a consequence, regulating it would be a
monumental and probably impossible task. A further consequence of this might be to
move transactions to electronic platforms where transparency is more fully recognized."
Reuters, From Fraud Is Easy in Big, Lightly Regulated Forex Market, 19th November
2003
The pressure has never been greater on firms trading foreign exchange to ensure that
they operate to the highest standards. Clients and banks must move to tighten their
internal controls and procedures in order to ensure that they comply with local and
international governance and professional market standards.
The Foreign Exchange Committee, Management of Operational Risk in Foreign Exchange. (New York: March
2003), p.3
2
From a statement by the Foreign Exchange Committee (New York: 1st December 2003).
On 1st December 2003 the the Foreign Exchange Committee3 stated that the Committee
will examine what measures can be taken [that] might include enhanced controls,
contemporaneous time-stamping of trades and straight through processing. The
Committee also recommended that all market participants assess their own operations
with a view to strengthening internal controls and ethical standards where necessary4
Trading FX electronically on FXall provides risk control tools as built-in features. Users
find access to competitive rates with a full suite of professional dealing tools while
benefiting from efficiencies gained when trading in an automated environment. FXall
provides an automated process for trade execution and matching and confirmation while
carefully segmenting the front, middle & back office functions. In addition, FXall offers
QuickConnect, an automated tool providing full connectivity, or STP, for execution and
confirmation, as another means of minimising risk.
The Foreign Exchange Committee is convened by the Federal Reserve Bank of New York and is composed of
representatives from major financial institutions involved in the foreign exchange markets. The Foreign
Exchange Committee and the Federal Reserve Bank of New York do not endorse any particular automated
dealing system.
4
From a statement by the Foreign Exchange Committee (New York: 1st December 2003).
In the table below we list the specific Best Practices from the Foreign Exchange
Committee where FXall has a clear role in helping firms implement Best Practices. A
complete listing of Best Practices is available in Appendix 2.
Foreign
Exchange
Committee
Best Practice
No.
FXC no. 4
FXC no. 5
FXC
FXC
FXC
FXC
FXC
FXC
FXC
Trade Capture
Enter Trades in a Timely Manner
Use Straight Through Processing
Use Real-Time Credit Monitoring
Use Standing Settlement Instructions
Operations Should Be Responsible for Settlement Instructions
Review Amendments
Closely Monitor Off-Market Transactions
no.
no.
no.
no.
no.
no.
no.
6
7
8
9
10
11
12
FXC no. 13
FXC no. 14
FXC no. 17
FXC
FXC
FXC
FXC
FXC
no.
no.
no.
no.
no.
18
19
21
23
24
FXC
FXC
FXC
FXC
no.
no.
no.
no.
25
26
27
28
Confirmation
Confirm and Affirm Trades in a Timely Manner
Be Diligent When Confirming by Non-secure Means
Institute Controls for Trades Transacted through Electronic Trading
Platforms
Verify Expected Settlement Instructions
Confirm All Netted Transactions
Confirm All Block Trades and Split Allocations
Automate the Confirmation Matching Process
Establish Exception Processing and Escalation Procedures
Netting
Use On-Line Settlement Netting Systems
Confirm Bilateral Net Amounts
Employ Timely Cut-offs for Netting
Establish Consistency between Operational Practices and
Documentation
FXC no. 31
FXC no. 34
Settlement
Use Automated Cancellation and Amendment Facilities
Understand the Settlement Process and Settlement Exposure
FXC
FXC
FXC
FXC
no.
no.
no.
no.
41
42
43
44
Accounting/Financial Control
Conduct Daily Position and P&L Reconciliation
Conduct Daily Position Valuation
Review Trade Prices for Off-Market Rates
Use Straight Through Processing of Rates and Prices
FXC
FXC
FXC
FXC
no.
no.
no.
no.
48
53
55
56
FXC
FXC
FXC
FXC
no.
no.
no.
no.
57
58
59
60
Online Trading
Telephone
F
R
O
N
T
O
F
F
I
C
E
Trade Allocations
M
I
D
D
L
E
O
F
F
I
C
E
Post-trade amendments
Daily Mark-to-Market
Trade Confirmations
B
A
C
K
O
F
F
I
C
E
2. Introduction to FXall
Since its inception, FX Alliance (FXall) has worked closely with leading corporate, financial
institutions and asset management firms to develop functionality that encompasses their entire
workflow. Simultaneously, FXall has expanded its network to include most of the major FX and
custodian banks. FXall focuses on adding value throughout the entire dealing workflow with a full
suite of products offering an end-to-end solution for all users.
The FXall suite has three product lines that address trading and processing needs. Each product
addresses a key aspect of the trading workflow:
FXall Trading
Settlement Center
QuickConnect
The FXall Trading and Settlement Center products can be used independently. For example, an
asset manager can use FXall for execution, but continue to use its existing processes for
confirmation and settlement preparation. Or the asset manager can adopt Settlement Center to
streamline its middle and back-office, but continue to use a combination of execution methods
telephone, FXall, etc.
Role-based entitlements and a full audit trail for all FXall functions ensure that activities are
properly controlled with maker/checker functionality. The audit trail record includes winning and
losing quotes, changes in SSIs, and indicative prices.
However, the best synergies, controls and operational efficiencies are achieved when the customer
adopts both products.
To learn about how FXall automates customers workflows, please see Appendix 1.
In addition, a bank should request that fund managers provide them with
the split information on the trade date for all trade types so that the
bank's credit information can be updated as soon as possible.
FXall has two types of automated block trading capabilities, pretrade and post-trade allocations. Both are optimized to ensure
implementation of Best Practice.
With automated pre-trade allocations, the trader can complete all the
executions by clicking a single button. From the counterparty banks
perspective, this is a more efficient method of processing block trades
and facilitates real-time credit checking before the deal is concluded.
Post-trade allocations are also available for trades executed over FXall or
the telephone. For phone trades, counterparties can agree to the spot
rate over the telephone, and then use Batch Trading to send the account
breakdown for the deal. The provider adds forward points if required
and, following review by the trader, the deal is booked electronically by
both parties. This method combines the relationship advantages of the
telephone with the straight through processing efficiencies of electronic
execution.
With either approach to automated allocations, all activities include a full
audit trail with each action stamped by time, date, and username.
10
11
The Non-Investment
Products code Bank
of England
Also see Best Practice No. 21, Confirm All Block Trades and Split
Allocations, No. 23, Automate the Confirmation Matching Process,
No. 24, Establish Exception Processing and Escalation Procedures
and Best Practice No. 34 Understand the Settlement Process and
Settlement Exposure.
In all markets, the confirmation provides a necessary final
safeguard against dealing errors. The issue and checking of
confirmations is a back-office responsibility which should be
carried out independently from those who initiate deals.
A confirmation of each deal should be sent out without delay and where
possible electronically.
the prompt dispatch and checking of confirmations is of great
importance. Non-standard settlement instructions should be particularly
carefully checked, and any discrepancies identified promptly upon
receipt, and notified direct to the counterparty
12
MT320 (Money Market) and MT305 (Plain Vanilla Options) message types
will be added in early 2004.
Settlement Center helps firms formalise their processes and also has a
number of reports available for monitoring each point of the settlement
process. These reports are particularly valuable when managing
settlement risk and understanding which trades may be unresolved at
any given moment in time.
FX Alliance is a member of the SWIFT network and operates its own BIC code.
13
14
3.4 Settlement
Best Practice no. 31: Use Automated Cancellation and Amendment Facilities
From the FXC Guide
2.
Value Date to Follow The customer can split the trade across
multiple value dates.
3.
4.
15
If the trade has been done off-platform but Settlement Center is being
used for confirmations, then counterparties can amend and cancel within
the back-office environment.
All amendments and cancellations whether done manually or via SWIFT
messaging are captured with a full audit trail and if required, maker /
checker functionality is available.
16
Best Practice no. 41: Conduct Daily Position and P&L Reconciliation
From the FXC Guide
The Non-Investment
Products code Bank
of England
17
18
19
20
Best Practice no.55: Use Internal & External Operational Performance Measures
From the FXC Guide
See also Best Practice no. 56: Ensure That Service Outsourcing
Conforms to Industry Standards and Best Practices.
FXall provides a Relationship Management Advisor (RMA) report
which allows firms to monitor their FXall statistics. The RMA
provides:
How much business the bank has the opportunity to win and how
much it is actually given
21
Best Practice no. 58: Maintain Records of Deal Execution and Confirmations
From the FXC Guide
22
23
FXall was founded by fourteen major international banks (and now has 17 equity
partners) whose substantial equity funding and contributions of liquidity,
marketing support and technical resources represent significant long-term
commitment to FXalls success.
24
FXall has been recognized many times by FX market participants and its peers by having
won numerous awards including the Euromoney 2003 award for Best Multibank Portal
and #1 Multibank Portal from Global Investor 2003 FX Survey. For more information,
see http://www.fxall.com/about/awards.html .
25
A.2 Front-Office
Through QuickConnect integration, trade requirements are automatically uploaded from
the clients Treasury or Order Management System to FXall.
Depending on the clients operating procedures, trade requirements can be uploaded as
locked orders, ready for execution and flagged with a list of credit-checked banks.
Alternatively these decisions can be left to the trading team.
The trader can choose between different styles of execution to seek the desired balance
of execution speed and price efficiency:
1. Use the competitive trading system to send a Request for Quote (RFQ) to
multiple providers simultaneously. The trader reviews the prices returned and
chooses the winning broker.
2. To quickly execute a large number of deals, use the Batch Trading system to
send several orders simultaneously to a single broker. The trader can complete
all the executions by clicking a single button.
3. Agree the spot rate for the deal over the telephone, and then use the Send
Details function in Batch Trading to send the account breakdown for the deal.
The broker prices any forward points required and, following review by the
trader, the deal is booked electronically by both parties. This method combines
the relationship advantages of the telephone with the straight through processing
efficiencies of electronic execution.
26
Traders can mix and match these methods as desired, selecting the best approach for
each individual deal.
And via the same QuickConnect integration, completed trade details can be
automatically returned back to the client and banks systems to allow for real-time
booking, credit monitoring and trader limit supervision.
Finally, for clients that perform net settlement, the netting module in Settlement Center
allows counterparties to combine multiple payments arising from different deals into a
single, equivalent payment. The benefits of netting include the simplification of the
settlement process and the reduction of settlement costs and risk exposure.
27
Confirmation
Best Practice no. 13: Confirm and Affirm Trades in a Timely Manner
Best Practice no. 14: Be Diligent When Confirming by non-secure Means
Best Practice no. 15: Be Diligent When Confirming Structured or Non-standard Trades
Best Practice no. 16: Be Diligent When Confirming by Telephone
Best Practice no. 17: Institute Controls for Trades Transacted through Electronic
Trading Platforms
Best Practice no. 18: Verify Expected Settlement Instructions
Best Practice no. 19: Confirm All Netted Transactions
Best Practice no. 20: Confirm All Internal Transactions
Best Practice no. 21: Confirm All Block Trades and Split Allocations
Best Practice no. 22: Review Third-Party Advice
Best Practice no. 23: Automate the Confirmation Matching Process
Best Practice no. 24: Establish Exception Processing and Escalation
Procedures
Netting
Best Practice no.
Best Practice no.
Best Practice no.
Best Practice no.
Documentation
25:
26:
27:
28:
Settlement
Best Practice no. 29: Use Real-Time nostro Balance Projections
Best Practice no. 30: Use Electronic Messages for Expected Receipts
Best Practice no. 31: Use Automated Cancellation and Amendment Facilities
Best Practice no. 32: Implement Timely Payment Cut-offs
Best Practice no. 33: Report Payment Failures to Credit Officers
Best Practice no. 34: Understand the Settlement Process and Settlement Exposure
Best Practice no. 35: Prepare for Crisis Situations Outside Your Organization
28
Nostro Reconciliation
Best Practice no. 36: Perform Timely nostro Account Reconciliation
Best Practice no. 37: Automate nostro Reconciliations
Best Practice no. 38: Identify non-receipt of Payments
Best Practice no. 39: Establish Operational Standards for nostro Account Users
Accounting/Financial Control
Best Practice no. 40: Conduct Daily General Ledger Reconciliation
Best Practice no. 41: Conduct Daily Position and P&L Reconciliation
Best Practice no. 42: Conduct Daily Position Valuation
Best Practice no. 43: Review Trade Prices for Off-Market Rates
Best Practice no. 44: Use Straight Through Processing of Rates and Prices
Unique Features of Foreign Exchange Options and non-Deliverable Forwards
Best Practice no. 45: Establish Clear Policies and Procedures for the Exercise of Options
Best Practice no. 46: Obtain Appropriate Fixings for non-standard Transactions
Best Practice no. 47: Closely Monitor Option Settlements
General Best Practices
Best Practice no. 48: Ensure Segregation of Duties
Best Practice no. 49: Ensure That Staff Understand Business and Operational Roles
Best Practice no. 50: Understand Operational Risks
Best Practice no. 51: Identify Procedures for Introducing New Products, New Customer Types
or New Trading Strategies
Best Practice no. 52: Ensure Proper Model Signoff and Implementation
Best Practice no. 53: Control System Access
Best Practice no. 54: Establish Strong Independent Audit/Risk Control Groups
Best Practice no. 55: Use Internal and External Operational Performance Measures
Best Practice no. 56: Ensure That Service Outsourcing Conforms to Industry
Standards and Best Practices
Best Practice no. 57: Implement Globally Consistent Processing Standards
Best Practice no. 58: Maintain Records of Deal Execution and Confirmations
Best Practice no. 59: Maintain Procedures for Retaining Transaction Records
Best Practice no. 60: Develop and Test Contingency Plans
29
30