Dealing room

A Dealing-room gathers traders operating

on financial markets. The dealing room is
also often called the front office.

The banks’ capital market and money

market (domestic and currencies)
businesses, foreign exchange, long-term
financing, bond market are gathered in today's
dealing room operation.
Dealing room

A trading-room serves two types of business:

trading, and arbitrage, a business of

Investment banks and brokers, referred to
as the sell side
Portfolio management, a business of asset
management companies and institutional
investors, referred to as the buy side.
 Dealing room
Foreign exchange dealing room operations
comprise functions of a service branch to
meet the needs of other branches/divisions
to buy/sell foreign currency.
It acts a profit centre for the bank/financial
institution
A dealer has to maintain two positions funds
position and currency position
Dealing room
 The funds position reflects inflows and
outflows of funds i.e. receivables and
payables.

 Currency position deals with

overbought and oversold positions,
arrived after taking various merchant or
inter-bank transactions and the dealer
is concerned with the overall net
position.
Dealing room
Net position - is the difference between total open
long (receivable) and open short (payable) positions in
a given assets (security, foreign exchange currency,
commodity, etc.) held by an individual.
 The overall net position exposes the dealer to
exchange risks from market movements

Dealing limit - The dealer has to operate within

the permitted limits prescribed for the
exchange position by the management
 Dealing room
 Back office: Takes care of processing deals,
accounts reconciliation. It plays a supportive
as well as checking role.

 Mid office: Mid-office deals with the risk

management and parameterizations of risks
for forex operations. Gives market information
to dealers.
 organization structure
the efficiency of treasury functions depends
on:
the nature of business of the financial
organization; and
the size of the financial organization

would best determine the appropriate

organization structure for its treasury and
treasury back-office functions.

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 Dealing room
 all treasury functions require to have clear demarcation
between the direct dealing and all settlement and support
functions .
 the “treasury” that would be involved only in dealing activities
and

 the “treasury support unit” (commonly known as the treasury

back-office) that would be responsible for all related support
functions.

 This is required for control reasons meaning that different

persons/ department should be responsible for the dealing
and the settlement, measurement, reporting etc.

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 Access Restriction

the dealers have access to global live

prices of various products through their
various communication tools, so they are
typically housed inside a covered
room known as the “dealing room” where the
access is generally restricted only to the
dealers and the related personnel.

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 Treasury support unit
 In order to monitor and manage the organization’s
balance sheet risk in a more detailed level, large
financial institutions have the setup of an additional
unit named the “treasury mid-office”.

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 foreign exchange and money market
interdependence

the two types of wholesale activities i.e. foreign

exchange and money market are heavily
interdependent, these are required to be housed in
the same area. This means that an organization’s
foreign exchange and money market activities are
to be unified in the same department for efficiency.

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 exchange the feedback with the money
market dealer

For example when a foreign exchange dealer is doing

a USD/BDT deal, this would involve the local currency
money market funding position and need to take/ give
feedback from/ to the money market desk.
When these two functions are centralized in the same
treasury department, the foreign exchange dealer, in
completing the deal, can exchange the feedback with
the money market .

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 exchange the feedback with the money
market dealer

 inter-bank dealing is highly time critical, the money

market dealer can make an optimum decision in an
efficient way when s/he receives the information at the
earliest possible time.

 the foreign exchange dealer can immediately pass on

the foreign currency funding information to the relevant
money market dealer who can immediately make an
efficient decision of the foreign currency funds effected
through the USD/BDT deal.

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 Risks Related Dealing Room
Operation:
Interest rate risk - Arises from movements in
interest rates in the market. The interest rate
exposure is created from the mismatches in the
interest re-pricing tenors of assets and liabilities of
an organization.
Liquidity risk - Arises from an organization’s
inability to meet its obligations when due. The
liquidity exposure is created by the maturity
mismatches of the assets and liabilities of the
organization.

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 Price risk - Arises from changes in the value of trading positions
in the interest rate, foreign exchange, equity and commodities
Markets.

Compliance risk - Arises from violations of or non-conformance

with laws, rules, regulations, prescribed practices, or ethical
standards.

Strategic risk - Arises from adverse business decisions or

improper implementation of them.

Reputation risk or franchise risk - Arises from negative public

opinion.

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 Some of the typical products in Foreign Exchange Transaction that
would fall under treasury’s functions can be listed as follows:
· Spot foreign exchange
· Forward foreign exchange
· Currency swap
· Interest rate swap
· Forward rate agreement
· Non-deliverable forward exchange
· FX options
· Overnight deposits
· Term deposits
· Coupon securities
· Discounted securities
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 Restrictions:

Treasury Traders Are Restricted From:

 Deal processing
 Accounting entries
 Sending/ receiving deal confirmations
 Issuing/ receiving Bangladesh Bank cheques
 Sending settlement instructions i.e. swift messages/
telexes

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 Restrictions:

 Generating revaluation rates

 Running the revaluation process
 Regulatory reporting
 Involvement in raising rate appropriateness
 Setting up/ approving counterparty credit limits
 Setting up/ approving market risk limits

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 Treasury back-office is restricted from:

 Dealing activities
 Decide on exchange rates/ quoting prices
 Striking deals with counterparties
 Raising deal slips
 Altering deal details
 Updating position blotters
 Deciding on nostro funding
 Approving counterparty credit limits
 Approving market risk limit

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 Dealing Limit:

 a dealer develops his/ her expertise and dealing instincts

over time, it is the management’s responsibility to assess
his/ her dealing capabilities

 based on that a specific dealing limit can be allocated to

an individual dealer.

the management also keeps in mind the dealer’s dealing

limit requirement in relation to the market and according to
the organization’s own size, need and market risk appetite.

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Definition of ‘Position Blotter'

 A trader's record of all the

transactions executed on a given day.
The Position blotter contains basic
information pertinent to a transaction,
with additional information included on
the deal slip. The Position blotter for a
forex trader would include both
opening and closing currency
positions initiated by the trader.
 Daily Treasury Risk Report:

The treasury back-office is required to summarize all daily

positions particularly the end-of-day positions on a report
format for the information of the senior management.

The report should ideally contain information about:

 outstanding open position against limit,

 different currency-wise outstanding exchange position

(against limits if applicable),
 outstanding foreign exchange forward gaps in different
tenors.

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 Mandatory Leave:
The dealing functions are extremely sensitive involving
wholesale and large amounts with exposures to adverse
market movements.

There is also risk of mistakes not being uncovered. As a

result, for a particular dealer’s functions to be run by a
different dealer, all dealers are required to be away from
their desks for a certain period of time at one stretch
during a year.

During this period, dealers are not expected to be in

contact with their colleagues in the treasury area.
Typically, this period is defined as a continuous two
weeks period.

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 Nostro Account Reconciliation:
Banks maintain various nostro accounts in order to
conduct operations in different currencies including BDT.
The senior operations manager of the organizations set
limits for handling nostro account transactions that
include;

 time limits for the settlements of transactions over the

various nostro accounts and the time

 amount limits for items that require immediate

investigation after receipt of the account statements.

 In defining these limits, consideration must be given to

the transit and processing times of the various types of
transactions.

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 Stop Loss Limits:

The management allocates dealing limits on each dealer

and/ or the treasury as a whole, based on the comfort.

However, there is always risk of adverse market

movements and no organization is in a position to
absorb/accept unlimited losses. This results in
organizations putting in place" stop loss limits”

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 Mark-to-Market:

This is a process through which the treasury back- office

values all outstanding positions at the current market rate to
determine the current market value of these.

This exercise also provides the profitability of the

outstanding contracts. The treasury back office gathers
the market rates from an independent source i.e. other
than dealers of the same organization which is required
to avoid any conflict of interest.

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 Separate Trading and Risk Management Units:

The traders are required to operate within

prescribed risk limit framework where a
different group of people known as the market
risk managers, have responsibilities of
identifying the risk areas and their appropriate
limits.

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 Taped Conversations:

In many occasions, the dealers conclude deals over the

phone. This Is particularly applicable where deals are done on
the local market, where dealers are mostly known to each
other and they feel comfortable dealing By talking to other
dealers over phone.

Such deals do not have any hard evidence and in a fast

dealing environment, there is risk of mistakes (of rates,
amounts or Value dates etc.) As a result, all telephonic
conversations taking place in the dealing room are required to
be taped. Taped conversations can assist in resolution of any
disputes that may arise..

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 Deal Recording:

The job nature of a dealer is;

 highly demanding, and
 the environment of a dealing room is very
active.
In such an environment when a dealer continues to deal,
his/ her focus remains on the market. So, there is a risk of a
dealer completely forgetting about a deal or part of a deal or
making mistake in recording that deal.

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 Deal Recording:

To eliminate this risk, a dealer must record the deal

immediately after it is concluded with the counterparty.
The deal recording needs to be done in two ways:

Position Blotter: Immediately after a deal is done, the

dealer should record the deal on the position blotter and
update his position.

Deal Slip: A dealer must, at the earliest possible time,

record the details of the deal on a slip or memo which is
known as the deal slip or deal ticket.

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 Deal Delay:

All deals done by dealers are required to be processed by the

treasury back-office for which they need to be informed of the
details of the deals within a certain time.

In this process dealers raise deal tickets that need to be sent

across to the treasury back-office within shortest possible time.

The timeliness of raising deal slips/ inputting into the automated

system as well as passing them on to the back-office is not only
sound business practice but also critical for monitoring of credit
risk, price risk and regulatory compliance.

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 Nostro, Vostro & Loro
• Nostro (Latin) Ours (“Our Account with
you”)
• Vostro Yours (“Your Account with us”)
• Loro - Theirs (“Their Account with us”)
 Nostro Account

 A nostro is our account of our money, held by you

Nostro accounts are usually in the currency of the

foreign country. This allows for easy cash management
because currency doesn't need to be converted.

Nostro is derived from the latin term "ours."

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 Vostro Account
A vostro is our account of your money, held by us.

A vostro (means "yours" in Latin) account is an

account maintained by an overseas bank with a Local
bank that allows the overseas bank to purchase Local
currency.

DU Banking EMBA
 Loro Account

There is also the notion of a loro account ("theirs"), which

is a record of an account held by a second bank on
behalf of a third party; that is, my record of their account
with you. A loro is our account of their money, held by
You.
(1)An account serviced by a bank on behalf of an account owner bank.
(2) An account held by a bank in our books on behalf of another
(=correspondent) bank. In principle, a liability account representing
balances maintained with the reporting entity for another bank.

DU Banking EMBA
correspondent account
A correspondent account is an
account (often called a nostro or vostro
account) established by a large banking
institution to receive deposits from,
make payments on behalf of, or handle
other financial transactions for smaller
financial institutions
Nostro and Vostro Account

The system of nostro and vostro accounts facilitates

foreign exchange dealings and settlements and allows
the settlement of currency transactions between the
Country's (Local) Bank and foreign banks.

DU Banking EMBA
Nostro and Vostro Account

A bank counts a nostro account with a

credit balance as a cash asset in its
balance sheet. Conversely, a vostro
account with a credit balance (i.e. a
deposit) is a liability, and a vostro with a
debit balance (a loan) is an asset.
 Example :
When X (Buyer) a trader in Base Country wants to purchase
$5000 worth of goods by paying cash. Mr. X deposits the
cash in his local bank in the country's currency for the
corresponding amount ($5000) then a swift message is sent
to the corresponding bank in the foreign country where the
local bank holds a NOSTRO account requesting the bank to
make the payment to Y (Seller) in his local currency i.e. US
Dollars. Thus facilitating the trade between X & Y. IF Y
wanted to buy something from X then the foreign bank would
complete the deal using their VOSTRO account in X's
country.

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Example
Consider that you (an importer) want to buy $1000
from SCB. You pay Tk. 82000 in return to SCB from
you account with it. SCB has an account with Bank of
America (BOA) for dealing with dollar transactions.
Here is the underlying transaction :SCB asks BOA to
credit your account (if you have a Dollar account with
BOA) and pays BOA from it’s Nostro account with
BOA.
Why the Perspective?
Vostro Accounts are shown as liability on BOA’s
balance sheet.
The same account (Nostro from SCB’s
perspective) is an asset on SCB’s balance
sheet

A loro is our account of their money, held by you

In the above example, the SCB refers to my
(importer’s) USD account with BOA as a
Loro account.