FOREIGN EXCHANGE TRANSACTIONS:

EXECUTION TO SETTLEMENT
RECOMMENDATIONS
FOR
NON-DEALER PARTICIPANTS

The Foreign Exchange Committee

Revised January 2016
The Foreign Exchange Committee

Table of Contents

Introduction ................................................. 2 Netting and Settlement...........................12

The Foreign Exchange Market ................... 2 Process Description .................................. 12
The Changing Marketplace ......................... 2 Recommendation No. 14: Mitigate
What is the Foreign Exchange Committee Settlement Risk and Confirm Bilateral
and what are the Best Practices? ............... 2 Amounts.................................................... 14
How to Use This Document ...................... 2 Recommendation No. 15: Provide
Settlement Instructions and Use Standing
Pre-Trade Preparation and Settlement Instructions ............................. 14
Documentation ......................................... 2 Recommendation No. 16: Request Direct
Process Description .................................... 2 Payments .................................................. 15
Recommendation No. 1: Determine FX
Needs and Develop Appropriate Account and Portfolio Reconciliation ...16
Infrastructure ............................................... 2 Process Description .................................. 16
Recommendation No. 2: Ensure Recommendation No. 17: Perform Timely
Segregation of Duties ................................. 3 Account and Portfolio Reconciliation ........ 16
Recommendation No. 3: Determine Recommendation No. 18: Identify
Appropriate Documentation ........................ 3 Nonreceipt of Payments and Submit
Recommendation No. 4: Communicate Compensation Claims in a Timely Manner
Necessary Information when Initiating or .................................................................. 17
Expanding Trading Relationships ............... 5 Accounting and Control.........................17
Trade Execution and Capture ................. 6 Process Description .................................. 17
Recommendation No. 19: Conduct Daily
Process Description .................................. 6
General Ledger, Position, and P&L
Recommendation No. 5: Establish Reconciliation ........................................... 18
Appropriate Trading Policies and Recommendation No. 20: Conduct Daily
Procedures .................................................. 6 Position Valuation ..................................... 18
Recommendation No. 6: Clearly Identify
Counterparties ............................................ 6 Other .......................................................19
Recommendation No. 7: Establish and Recommendation No. 21: Develop and
Control System Access ............................... 8 Test Contingency Plans ............................ 19
Recommendation No. 8: Enter Trades Recommendation No. 22: Ensure Service
Immediately ................................................. 8 Outsourcing Conforms to Best Practices . 20
Confirmation............................................. 9 Acknowledgments..................................21
Process Description .................................... 9
Recommendation No. 9: Confirm Trades Recommended Reading.........................22
Immediately ................................................. 9
Recommendation No. 10: Allocation of
“Block” Transactions ................................. 10
Recommendation No. 11: Identify and
Resolve Confirmation Discrepancies in a
Timely Manner .......................................... 11
Recommendation No. 12: Unique Features
of Foreign Exchange Options ................... 11

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Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

Introduction

The Foreign Exchange Market

The foreign exchange (FX) market is the largest sector of the global financial system. According
to the 2013 Triennial Survey conducted by the Bank for International Settlements, FX turnover
averages USD 5.3 trillion per day in the cash exchange market and an additional USD 2.3 trillion
per day in the over-the-counter (OTC) FX and interest rate derivatives market.1 The FX market
serves as the primary mechanism for making payments across borders, transferring funds, and
determining exchange rates between different national currencies.

The Changing Marketplace

Over the last decade, the FX market has grown in terms of volume and diversity of participants
and products. Although commercial banks have historically dominated the market, today’s
participants also include investment banks, brokerage companies, multinational corporations,
money managers, commodity trading advisors, insurance companies, governments, central
banks, and pension and hedge funds. In addition, the size of the FX market has grown as the
economy has continued to globalize. The value of transactions that are settled globally each
day has risen exponentially—from USD 1 billion in 1974 to USD 5.3 trillion in 2013.

What is the Foreign Exchange Committee and what are the Best Practices?
The Foreign Exchange Committee (the Committee) is an industry group sponsored by the
Federal Reserve Bank of New York that provides guidance and leadership to the global foreign
exchange market through the development and implementation of best market practices and
through enhancing the broader public’s knowledge and understanding of the foreign exchange
market via publications and other efforts. In all its work, the Committee seeks to improve the
efficiencies of the foreign exchange market, encourage steps to reduce settlement risk, and
support actions that facilitate greater contractual certainties for all parties active in foreign
exchange.

In 1998, the Committee recognized the need for a checklist of best practices that could aid Non-
Dealer Participants as they enter the foreign exchange market and develop internal guidelines
and procedures to foster improvement in the quality of risk management. The original version
of Foreign Exchange Transaction Processing: Execution to Settlement, Recommendations for
Non-Dealer Participants was published in 1999 by the Committee’s Operations Managers
Working Group to serve as a resource for market participants as they periodically evaluate their
policies and procedures regarding foreign exchange transactions. This 2015 update takes into
account market practices that have evolved since the paper’s original publication and
supersedes previous recommendations by the Committee regarding Non-Dealer Participants.

The purpose of this paper is to share the experiences of financial institutions (those firms that
are most active in the growing foreign exchange market) with Non-Dealer Participants (the
businesses that may participate in the foreign exchange market on a more occasional basis).
The twenty-two issues highlighted are meant to promote risk awareness for Non-Dealer
1
Bank for International Settlements, Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2013
(Basel: BIS, 2013).

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Participants and provide "best practice" recommendations. Participants in prime brokerage or

similar arrangements should also be familiar with these Recommendations. This collection of
best practices may mitigate some of the trading and operational risks that are specific to the FX
industry. The implementation of these practices may also help limit potential financial losses
and reduce operational costs.

This document is intended for use by Non-Dealer Participants. Those Non-Dealer Participants
that are particularly active in the FX market are encouraged to also review the Global Preamble:
Codes of Market Practice and Shared Global Principles as well as Committee’s guidance to other
market participants, specifically the Guidelines for Trading Activities in Foreign Exchange and
the Management of Operational Risk in Foreign Exchange. These documents provide more
detailed discussion of the business practices and operational guidelines appropriate to
institutions with larger or more complex foreign exchange activities. Copies of these papers
may be viewed online or downloaded from the Foreign Exchange Committee's web site at
www.newyorkfed.org/fxc.

How to Use This Document

This document is divided into sections based on the six phases of the FX transaction process
flow: 1) pre-trade preparation and documentation; 2) trade execution and capture; 3)
confirmation; 4) netting and settlement; 5) account and portfolio reconciliation; and 6)
accounting/financial control processes. How each of these individual phases integrates with
the others in the FX process flow is outlined in Figure 1 below. Each section of this paper
provides a process description of the steps involved in the trade phase discussed in that
section, followed by a list of best practices specific to that phase. The paper concludes with
general best practices that apply to overall risk management, including guidance for
contingency planning and service outsourcing.

Figure 1 - The FX Process Flow

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Recommendations for Non-Dealer Participants
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Pre-Trade Preparation and Documentation Clear policies and procedures governing all
aspects of FX transactions trading and
Process Description processing should be established,
The pre-trade preparation and documented and maintained. As the nature
documentation process initiates the of a Non-Dealer Participant’s activities in
business relationship between two parties. the FX transaction market may continually
During this process, both parties’ needs and change and evolve, policies and procedures
business practices should be established. should be periodically reviewed and
An understanding of each counterparty’s updated.
legal entity status, trading characteristics
and level of technical sophistication should All Non-Dealer Participants should ensure
also develop. In summary, the pre-trade that they engage sufficient and experienced
process allows both parties to mutually personnel to execute their FX transaction
agree on procedures and practices for mandate. Each group or individual playing
ensuring the safe and sound conduct of a role in the FX transaction process flow
business. should have a complete understanding of
how FX transactions are initiated, recorded,
Recommendation No. 1: Determine FX confirmed, settled, collateralized and
Needs and Develop Appropriate accounted for. Insufficient knowledge of
Infrastructure the overall FX transaction process, or any
misunderstanding in respect of the role
It is critical for each Non-Dealer Participant played by each individual or group, can lead
to determine its underlying FX requirements to an improper segregation of duties,
and establish the appropriate infrastructure inadequate controls, and/or increased risk
to support its activities. for the Non-Dealer Participant and its
counterparties. In particular, a Non-Dealer
Prior to initiating FX transactions (which for Participant should understand whether a
the purposes of this paper shall include FX party is acting as principal or as agent, along
spot, forwards, swaps, options and with the implications of such role, as to the
variations thereof, except where otherwise level of knowledge and experience that its
specified), a Non-Dealer Participant should representatives will need to perform their
perform a thorough assessment of its respective functions. All Non-Dealer
foreign currency activities within the Participants should provide ongoing
context of its business and financial employee education regarding business
strategy. The risks associated with engaging strategies, roles, responsibilities, and
in activities with respect to FX transactions policies and procedures.
– including market, liquidity, credit, legal,
operational, regulatory and settlement risks A clear ethics policy should be established,
– need to be identified, quantified and such as a code of conduct and/or external
managed. Additionally, where applicable, a business conduct rules that conform to
Non-Dealer Participant should also applicable laws, good convention and
familiarize itself with the risks associated corporate policies2. Senior management
with trading in FX transactions involving
restricted currencies, including, without 2
See the Global Preamble: Codes of Best Market Practice and
limitation, the ability to divest local assets. Shared Global Principles.

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should ensure that such policies are well so, operations staff must have a reporting
circulated, understood, and periodically line that is not directly subject to an
reviewed by all personnel. The policies organizational hierarchy that could lead to a
should be regularly updated to ensure they conflict of interest or compromise of
cover new business initiatives and market control. Non-Dealer Participants with a
developments. small number of treasury staff and an
overlap in employee responsibilities should
Recommendation No. 2: Ensure establish and document workflows and
Segregation of Duties systems to prevent unauthorized activities.
Such arrangements should be periodically
Non-Dealer Participants should preclude verified by an independent audit conducted
individuals from having concurrent trading, by either internal or external auditors, or
confirmation, payment, and general ledger both where appropriate.
reconciliation responsibilities. Reporting
lines for trading and operational personnel Recommendation No. 3: Determine
should be independent and individuals with Appropriate Documentation
supervisory responsibilities should ensure
that appropriate segregation of duties exists For OTC uncleared products, Non-Dealer
between operations and other business lines Participants should determine their
and within operations. documentation requirements giving
consideration to applicable laws or
Responsibility for trade execution, trade regulations and know whether those
confirmation, payments, regulatory requirements have been met prior to
reporting, collateral management and trading in FX transactions.
general ledger reconciliation should be
segregated as needed or to the greatest A Non-Dealer Participant should begin
extent possible. At a minimum, trading FX transactions only if it has the
responsibility for trade execution should be proper documentation in place. The use of
segregated from responsibility for industry standard documents is strongly
subsequent processing steps. When such encouraged, to provide a sound mutual
duties are not segregated, the potential for basis for conducting transactions in FX
misconduct may increase. For example, an transactions. There are a variety of
individual might be able to complete documents that ensure the smooth
unauthorized trades and then hide any functioning of the markets for FX
resultant losses. transactions and that protect market
participants, including:
Individuals responsible for confirmation,
settlement, reconciliation, collateral  Authority documents, which address
management and regulatory reporting must both capacity (the right of a Non-Dealer
be able to report any and all issues to Participant to enter into a transaction)
individuals with supervisory responsibilities and authority (permission for an
or other designated individuals individual to implement the capacity to
independent of the trading function. To do act on the Non-Dealer Participant’s
behalf). If a Non-Dealer Participant has
http://www.newyorkfed.org/FXC/2015/Global%20Preamble%20
March30.pdf retained a third party to act on its behalf
Foreign Exchange Transactions: Execution to Settlement Page 3
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

in executing transactions in FX engaged by the Non-Dealer Participant,

transactions, that retention should be for example documentation related to
documented in an agreement and that accessing financial market
agreement should be delivered by the infrastructures that enable payment-
Non-Dealer Participant to each of its versus-payment (PvP) settlement
Dealing Firms. arrangements to mitigate principal risk,
if it is anticipated that such third party
 Master Agreements contain terms that services may be used in the settlement
will apply to broad classes of of transactions.
transactions, including expressions of
market practice and convention, and  Any engagement by a Non-Dealer
terms for netting, termination, collateral Participant of an agent or advisor should
management and liquidation.3 be accomplished in a manner that is
express and transparent.
 Custodial Agreements contain terms
that outline an arrangement whereby Each Non-Dealer Participant is responsible
an institution acting as a custodian for ensuring that it has the capacity to enter
holds assets or property, and performs into an FX transaction, as well as for
other agreed-upon services, on behalf monitoring and enforcing compliance with
of the actual owner (the beneficial its internal procedures regarding any
owner). Non-Dealer Participants should limitations imposed on the trading
see that custodial arrangements are authority of its employees or third parties
sufficiently robust to support FX acting on its behalf. As such, forwarding to
transactions. Dealing Firms documentation that includes
a number of investment limitations and
 Confirmations summarize the terms and restrictions affecting a Non-Dealer
conditions agreed by the parties to an Participant’s ability to trade and invest is
FX transaction. not consistent with best market practice.4

 Standard Settlement Instructions A Non-Dealer Participant should also

provide for the exchange of payment establish a policy on whether or not it will
instructions in a standardized, secure trade, and in what circumstances, prior to
and authenticated format. executing a master agreement with a
counterparty. It should also be noted that
 Any required documentation relating to electronic trading often requires additional
third party settlement services to be or different documentation. Specifically,
customer and user identification
3
procedures, as well as security procedures,
Applicable master agreements include, e.g.: (i) the
International Swaps and Derivatives Association Master should be documented. Also, a Non-Dealer
Agreement and Credit Support Annex; (ii) the International Participant should be aware that regulatory
Foreign Exchange Master Agreement (IFEMA), the International
Currency Options Market Master Agreement (ICOM), and the bodies have the authority to mandate that
International Foreign Exchange and Options Master Agreement certain FX transactions be executed on
(FEOMA); and (iii) the International Foreign Exchange and
Currency Options Master Agreement (IFXCO). Copies of IFEMA, regulated electronic platforms (e.g., in the
ICOM, FEOMA and IFXCO are publicly available at:
4
<www.newyorkfed.org/fmlg> and <www.newyorkfed.org/fxc>, For related guidance on this issue please see the letter to market
respectively. participants on the FX Committee’s website.

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U.S., swap execution facilities [SEFs]) or those activities. While each Dealing Firm
cleared through central counterparties. may have different procedures for
Should those regulatory bodies exercise implementing these requirements, Non-
such authority, then the Non-Dealer Dealer Participants should cooperate in
Participant should be cognizant of its providing the information that allows
obligations (if any) pursuant to the Dealing Firms to fulfill these obligations.
rulebooks of applicable electronic platforms Additionally, certain regulations require
and/or central counterparties, as well as very specific information to be provided to
pursuant to any contractual agreement a Dealing Firm by a Non-Dealer Participant
governing the Non-Dealer Participant’s wanting to trade certain FX transactions,
access to regulated execution and clearing. including a Legal Entity Identifier (i.e., a
unique ID associated with a single corporate
In addition to settlement netting, master or other type of legal entity) (“LEI”).
agreements may provide for “close-out”
netting. Close-out netting clauses provide Recommendation No. 4: Communicate
for: 1) appropriate events of default, Necessary Information when Initiating or
including default upon insolvency or Expanding Trading Relationships
bankruptcy; 2) closeout of all covered
transactions; and 3) the calculation of a When initiating or expanding trading
single net obligation from unrealized gains relationships to cover FX transactions, Non-
and losses. Close-out netting provisions Dealer Participants should take steps to
provide significant risk management communicate all necessary information,
benefits to both parties to a master including providing required
agreement by providing for the netting of documentation, to Dealing Firms so that
all outstanding transactions under an Dealing Firms can perform the necessary
agreement. Master agreements with legally tasks to provide credit to the underlying
enforceable close-out netting provisions legal entities on behalf of which Non-Dealer
receive bankruptcy and insolvency law Participants intend to be trading.
protection to ensure that the defaulting
counterparty remains responsible for all Non-Dealer Participants should take the
existing contracts and transactions under appropriate steps to provide their Dealing
the agreement and not just those it Firms with the documentation required to
chooses. Thus, close-out netting provisions complete set up of the trading relationship
provide the legal basis for parties to for FX transactions, including any
measure counterparty exposure on a net documentation needed to identify the legal
rather than a gross basis. entities on behalf of which the Non-Dealer
Participants intend to transact in FX
A Non-Dealer Participant should be aware transactions. Non-Dealer Participants
that Dealing Firms are likely subject to should take such steps when initiating
statutory, regulatory and supervisory trading relationships for FX transactions on
requirements for “knowing” their behalf of new legal entities, or when
customers. Dealing Firms need to know the expanding existing relationships in other
identity of their counterparties, the asset classes to cover FX transactions.
activities they intend to undertake with the
Dealing Firm, and why they are undertaking
Foreign Exchange Transactions: Execution to Settlement Page 5
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

It is recommended that Non-Dealer terminology. When trades are verbally

Participants wait to transact in FX executed, Non-Dealer Participants should
transactions until after they have received carefully reconfirm key terms with the
notice from Dealing Firms that all steps in Dealing Firm prior to ending the call and
initiating or expanding trading relationships booking the transaction in their trade
have been completed. capture systems.

Non-Dealer Participants electing to leave

Trade Execution and Capture orders with Dealing Firms should establish a
clear understanding with such Dealing Firms
Process Description as to how such orders will be handled.
The trade execution and capture function is Non-Dealer Participants and Dealing Firms
the next phase of the processing flow for FX should endeavor to clearly agree up front
transactions. FX transactions may be the specific terms of the order, particularly
executed through voice or on an electronic when such orders are to be executed,
platform. Electronic platforms can be cancelled or modified by the occurrence of
proprietary or multi-dealer and can be subsequent events. If Dealing Firms are
regulated or not.5 Information captured for supposed to take certain actions in relation
FX transactions typically includes trade to an order upon the achievement of
date, time of execution, settlement date, specific market metrics, then Non-Dealer
counterparty, financial instrument traded, Participants and the Dealing Firms should
amount transacted, and price or rate. agree in advance on the rate or price
sources to be used in determining whether
Recommendation No. 5: Establish such metrics have been met.
Appropriate Trading Policies and
Procedures Given the 24-hour nature of the market for
FX transactions, Non-Dealer Participants
Non-Dealer Participants should endeavor to should have clear policies and procedures
execute transactions in FX transactions in a on trading off-premises or off-hours, which
manner which reduces the possibility of may include restrictions on trading. Non-
mismatches, errors, and unauthorized Dealer Participants allowing such trading
dealing. Once executed, FX transactions should consider instituting procedures to
constitute binding obligations of both ensure that trades executed off-premises or
parties to the transaction. Although off-hours are promptly entered in their
subsequent processing steps (e.g., trade capture systems as soon as
confirmation) may uncover problems, the reasonably possible.
best protection from unanticipated loss is to
avoid problems from the outset. Recommendation No. 6: Clearly Identify
Counterparties
Transactions in FX transactions should be
executed only by internally authorized staff Non-Dealer Participants should clearly
that are experienced and knowledgeable as identify the legal entity on whose behalf
to market practice and FX transaction they are entering into an FX transaction.
5
Additionally, Non-Dealer Participants should
See reference to regulated electronic platforms in
Recommendation No. 3.
endeavor to obtain the name of the legal
Foreign Exchange Transactions: Execution to Settlement Page 6
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

entity that the Dealing Firm uses as  incorrect assessment of

counterparty to the same transaction. A counterparty performance risk and
Non-Dealer Participant should have policies exposure reporting;
and procedures that prohibit trading with a  erroneous bookings and/or
legal entity that has not been authorized misdirected settlements, which
internally, even if the Non-Dealer could potentially result in a loss for a
Participant has authorized other legal counterparty to the transaction;
entities within the same Dealing Firm.  misallocation of collateral;
 disclosure of transaction
Non-Dealer Participants should ensure that information to incorrect entities;
they recognize the importance of clearly and
and accurately identifying:  inaccuracies in reporting transaction
 to the Dealing Firm, the legal entities on activity to a regulatory body or
which behalf the Non-Dealer client.
Participants are entering into an
transaction; and The practice of trading FX transactions on
 for themselves, the legal entities serving an unnamed basis, also referred to as
as their counterparties on behalf of the undisclosed principal trading, presents an
Dealing Firms for the same transaction. adverse risk to both the individual market
participants and the broader financial
To facilitate the abovementioned market. Such practices constrain the ability
identification, Non-Dealer Participants of a Dealing Firm to assess the
should encourage their staff (i) to provide creditworthiness of their counterparties
their name and affiliation in all and comply with “know your customer” and
communications with Dealing Firms and (ii) anti-money laundering rules and
to obtain the names and affiliations of the regulations – exposing Dealing Firms to
staff transacting on behalf of their Dealing clear and significant legal, compliance,
Firms. Clear counterparty identification is credit, and reputational risks and
particularly important when either the Non- heightening the risk of fraud. It is
Dealer Participants or the Dealing Firms: recommended that both Non-Dealer
 have multiple legal entities Participants’ investment advisors and
(subsidiaries and affiliates), Dealing Firms implement measures to
branches and offices that are trading eliminate the practice of trading FX
FX transactions; transactions on an unnamed basis.
 have been involved in acquisition, Specifically, Non-Dealer Participants’
divestiture or restructuring activity investment advisors and FX transaction
that has led to name changes; and intermediaries should develop a process to
 are transacting in an agency disclose customer names to a Dealing Firm’s
capacity. credit, legal, and compliance functions prior
to the execution of FX transactions. The
Failure to properly identify the legal entity proper use of LEIs in transactions for
serving as counterparty to a specific FX specific FX transactions will ensure proper
transaction potentially raises a number of identification of parties to the transaction.
risks, including:

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the Non-Dealer Participant to a risk of

financial loss.
Recommendation No. 7: Establish and
Control System Access Non-Dealer Participants should periodically
review system access and entitlements, and
As the trading or processing infrastructure should revoke the access of users who no
for FX transactions continues to evolve in longer require such access to perform their
response to regulation and participant job function. Under no circumstance
needs, rigorous controls need to be should operations or trading personnel
implemented and monitored to ensure that have the ability to modify a production
data integrity and security are not system if they are not authorized to do so.
undermined. Non-Dealer Participants
should ensure that only authorized Recommendation No. 8: Enter Trades
individuals have the ability to alter and/or Immediately
gain user access to any portion of the
trading or processing infrastructure that Non-Dealer Participants should ensure that,
Non-Dealer Participants employ. as soon as FX transactions are executed,
their terms are immediately entered into
Transactions in FX transactions are appropriate systems and are accessible for
frequently executed on electronic both trading and operations processing.
platforms, whether due to regulatory Non-Dealer Participants should have
imperatives or participant preferences. internal policies and procedures guiding
Electronic execution has been encouraged immediate trade-entry or capture of
as it reduces trading- and operations- transactions. Adherence to these policies
related errors, particularly when straight- may be subject to internal audit, regulatory
through processing is achieved (i.e., trade or review.
data flowing directly from the electronic
platform to the front-end trading system It is crucial that Non-Dealer Participants
and to the operations system books and immediately enter all transactions in FX
records). transactions into appropriate systems, so
that all relevant systems and processes are
To continue maximizing the benefits of provided with and can function based on
electronic execution, Non-Dealer timely, updated information. For example,
Participants should ensure that access to front-end systems that capture transaction
applicable production systems should be information may interface with other
given only to those individuals who require systems that monitor and update credit
such access to perform their job function. limit usage, intra-day P&L, trader positions,
Lack of adequate access controls and confirmation status, settlement
related monitoring can result in instructions, and general ledger activity.
unauthorized trading activity. Without Non-Dealer Participants should strive to
proper access control, the flow of data work with Dealer Firms to leverage straight-
between the electronic platform and the through processing capabilities and avoid
front-end trading system or operations manual intervention
system books and records can be altered,
compromising data integrity and subjecting
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The ability of a Non-Dealer Participant to Swaps and Derivatives Association (ISDA),

manage risk may be adversely affected if it which may be supplemented by EMTA
does not have accurate transaction updates terms, for NDFs and options, or other
for each of the systems mentioned above. relevant terms set forth by applicable
The failure to immediately record FX market infrastructure (e.g., regulated
transactions misrepresents contractual electronic platforms).
positions and can result in:
 inaccurate accounting records; Recommendation No. 9: Confirm Trades
 mismanagement of market risk; Immediately
 misdirected or failed settlement;
and Non-Dealer Participants should make every
 the failure of a trade to be booked effort to confirm trades in FX transactions
at all. within two hours after execution and in no
event later than the end of the day on the
Confirmation trade date. In cases where the confirmation
is not automated (as described below)
Process Description trades should be confirmed as soon as
The transaction confirmation is evidence of possible and no later than the end of the
the terms of an FX transaction. Therefore, day following execution.
proper management of the confirmation
process is an essential control. This process Prompt confirmations are key to the orderly
is handled in several different ways, functioning of the marketplace for FX
depending on the type of FX transaction. transactions because they reduce market
For spot, forward FX, or vanilla currency risk and minimize the risk of loss due to
option transactions, counterparties settlement errors. In the absence of timely
generally exchange or match electronic or confirmation, trade discrepancies may go
paper confirmations that identify the undetected, potentially leading to disputes,
transaction details and provide other disrupting the settlement process and
relevant information. For other increasing processing costs. It can also
transaction-types, for example non- result in failed trades or inaccurate
deliverable forwards (NDFs), exotic accounting records, and can adversely
currency option transactions or structured affect any underlying transaction. Given the
and non-standard transactions, documents significance of the confirmation process, it
may be prepared and either: 1) exchanged is important that the process is handled
or matched by both counterparties; or 2) independently of the trading function.
signed and returned.6
Non-Dealer Participants should understand
All confirmations should either be subject the confirmation practices for each Dealer
to the 1998 FX and Currency Option Firm that they transact with and for each
Definitions issued by the Foreign Exchange relevant FX transaction category including,
Committee, Emerging Markets Traders for example, whether for a particular
Association (EMTA), and International transaction: (i) both parties will use an
electronic means of confirmation; (ii) each
6
party will send out its own paper
Typically, the Dealing Firm prepares the confirmation and the
Non-Dealer Participant signs the confirmation.
confirmations; or (iii) Non-Dealer
Foreign Exchange Transactions: Execution to Settlement Page 9
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Participants will sign and return incoming pronouncement with similar legal force
confirmations from the Dealer Firm. It is required of the Non-Dealer Participant or
not recommended that the Non-Dealer Dealing Firm. Confirmations that are
Participant simply accept receipt of its amended to correct errors should be sent
counterparty’s confirmation as completion promptly, if they are necessary. Settlement
of the confirmation process. instructions for FX forward transactions
should be reconfirmed between the parties
Confirmations should be transmitted in a to the trade two days before the value
secure manner whenever possible. settlement date.
Automated confirmations match one
party's trade details to its counterparty's Once a trade between counterparties has
trade details, or are formed by acceptance been confirmed, such trades may be the
of terms online. Automated confirmation subject of novation or other similar
minimizes manual error and is the most agreements, which should be confirmed in
timely and efficient method of confirmation a similarly vigorous manner.
because it requires no subsequent
confirmation or manual check. FX Recommendation No. 10: Allocation of
transaction confirmations may also be “Block” Transactions
formed using methods agreed by the
parties, either explicitly or by their course of The block transaction details should be
conduct, which may include e-mail or fax. It reviewed and affirmed to the dealer by
is important to note that when these open agents as soon as possible following
communication methods are used there is a execution, ideally within two hours of
greater risk of human error, fraudulent execution. Furthermore, agents should
correspondence or disclosure of allocate the block transaction within eight
confidential information to unauthorized hours following execution.
parties. When sending confirmations for FX
transactions by fax, or e-mail, Non-Dealer Investment managers or others acting as
Participants should take additional steps to agent on behalf of multiple counterparties
assure receipt by the correct Dealing Firm. may undertake "block" transactions that
are subsequently allocated to specific
Data included in a confirmation should underlying counterparties. In such cases,
contain, at a minimum, the following: (i) the agents should provide dealer-
names of the legal entities that are serving counterparties an indication prior to
as counterparties to the transaction in FX execution that a transaction will be
transactions and the obligation/role of each allocated. Agents should review and affirm
of the counterparties; (ii) any branch or the details of the block (pre-allocation)
office through which each legal entity is transaction as soon as possible following
acting; (iii) the transaction date (or trade execution, ideally within two hours of
date); (iv) the value date (or settlement execution. Each underlying counterparty in
date); (v) the amounts of the currencies a block transaction must be an approved
being bought and sold; (vi) the settlement and existing counterparty of the dealer-
instructions; and (vii) any term that a counterparty prior to allocation. Agents
confirmation is explicitly required to contain should allocate the full amount of the block
by statute, regulation, or other transaction as soon as possible, no later
Foreign Exchange Transactions: Execution to Settlement Page 10
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

than eight business hours following transaction terms, or inaccurate or

execution. Each post-allocation transaction inconsistent settlement instructions.
must be advised to the dealer-counterparty
and confirmed promptly, in accordance To mitigate this risk, confirmation
with the timing requirements set forth in discrepancies should be brought to the
applicable confirmation rules. dealer’s attention immediately and resolved
as quickly as possible. Additionally,
The failure to allocate a transaction on a procedures should be established to
timely basis could result in increased credit, escalate unresolved discrepancies to
legal, regulatory and operational risk. increasingly higher levels of management in
Specifically, a delay in allocation hampers accordance with regulatory time frames7.
the management of credit exposure. Trade Automated trade confirmation systems are
confirmations may also be delayed, which strongly recommended if available through
in turn may create regulatory issues, your dealer. These systems can highlight
interrupt the settlement process, and, in discrepancies and mitigate potential
extreme cases, cause payment failures. To problems. Processes should be in place to
minimize errors caused by manual detect repetitious discrepancies.
intervention, trade allocations should, if
possible, be provided to the Dealing Firm Recommendation No. 12: Unique Features
electronically through secure networks or of Foreign Exchange Options
authenticated means.
Market participants should establish clear
Recommendation No. 11: Identify and policies and procedures for the
Resolve Confirmation Discrepancies in a confirmation, exercise, and settlement of
Timely Manner foreign exchange options and to familiarize
staff with the additional terms and
Discrepancies between a confirmation conditions associated with options in order
received from a dealer and a Non-Dealer to reduce operational risk.
Participant’s own records should be brought
to the dealer’s attention immediately. Foreign exchange options are more
Escalation procedures should be established complex products than spot and forward
to resolve any unconfirmed or disputed transactions. Options incorporate additional
terms as a matter of urgency. and often complex contract terms (such as
strike price, call or put indicator, premium
Unintended exposure to market risk may price, and expiry date and time). Their
arise when trade discrepancies exist. Trade value is determined not only by spot and
discrepancies may also lead to increased forward exchange rates, but also by implied
processing costs, inaccurate accounting
records, failed settlements including
underlying hedged assets or liabilities and 7
For example, U.S. swap dealers are subject to regulatory
financial loss. Unconfirmed trades may timeframes for delivery, and in addition, must institute policies
result from simple trade entry errors, more and procedures reasonably designed to ensure confirmations are
formed or returned by counterparties within prescribed
serious disagreements between timeframes. As such, confirmation delay may result in dealer
counterparties with respect to the agreed chasing and escalation, regulatory reporting, and may possibly
impact ability to trade (see, e.g., 17 CFR pt. 23.501 (2012)).

Foreign Exchange Transactions: Execution to Settlement Page 11

Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

volatilities and time remaining until Recommendation No. 13: Unique Features
expiration. of Non-Deliverable Forwards

Option values may change rapidly and in a Non-Dealer Participants should establish
non-linear manner. Management should clear policies and procedures for the
clearly define FX options trading roles and confirmation and settlement of foreign
responsibilities to ensure that the higher exchange non-deliverable forwards (NDFs)
inherent risk of options is well controlled. and familiarize staff with the additional
Operations staff should be fully versed in terms and conditions associated with NDFs,
options terminology, contract provisions in order to reduce operational risk.
and market practice. All transaction terms
should be confirmed on the trade date NDFs are cash-settled FX forward
electronically or in writing in accordance transactions that require a rate fixing to
with regulatory time frames. Certain exotic determine the amount and direction of the
options may also require the collection of cash settlement. NDFs, much like FX
additional information or rates, depending options, also have additional trade terms
on the product. and require additional handling and
processing. In addition, NDF transactions
Options premium settlements should be may be more susceptible to market
closely monitored to reduce the potential disruptions. Where possible, Non-Dealer
for out-trades. Participants are encouraged to sign a
Master Confirmation Agreement (MCA) for
Options possessing value at expiration (“in- NDFs.
the-money”) must be properly exercised if
such value is to be realized. The exercise of Even with an MCA in place, counterparties
an option generally creates a new position should confirm NDF transaction terms in
in the underlying instrument (e.g. spot accordance with stipulated regulatory time
dollar-yen) requiring further processing and frames. In addition to the standard
settlement. Special attention should be transaction details (such as the
paid to the sale of options (naked short counterparties and the office or legal entity
positions) which generally entail through which each are acting, the
significantly higher levels of market risk. transaction date, the notional amounts of
Clear policies and procedures relating to the currencies, and the settlement
options exercise should be established and, instructions), NDFs require additional trade
where possible, systems should be designed terms that require confirmation, such as the
to auto-exercise expiring in-the-money fixing source and fixing date.
options.
Netting and Settlement

Process Description
Settlement is the making of payments or
exchange of payments between
counterparties on a FX transaction’s
settlement date.

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Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

transfer of a payment in another currency

With respect to FX transactions consisting occurs. In a basic PVP arrangement, a trade
of two payment flows at settlement, will settle only if each counterparty pays the
settlement risk (also referred to as correct amount. If a party fails to pay, its
“principal risk” or “Herstatt Risk”) is the risk counterparty will receive back the currency
that one party to an FX transaction makes it was selling, thus providing protection
its payment to its counterparty but does mitigating against settlement risk. Certain
not receive the payment it expects from its market infrastructures exist that provide
counterparty, resulting in the outright loss PvP settlement.9 PvP settlement mitigates
of the full value of the transaction. This the risk that one side of an FX transaction is
could cause a large, even catastrophic, loss. settled with finality without the
This risk is particularly significant in the FX corresponding other side also being settled
market given the size of the notional with finality and ensures that the principal
amounts being exchanged, and arises in FX amounts involved are protected.10 PvP
trading because the making of a payment in arrangements could also involve bilateral
one currency and receipt of the counter- agreements between counterparties that
currency payment do not always occur call for settlement to occur on a PvP basis.
simultaneously. Settlement risk is
measured as the full amount of the Bilateral obligation netting is another
currency purchased and is considered at method by which parties may manage
risk from the time a payment instruction for settlement risk. Bilateral obligation netting
the currency sold becomes irrevocable until is the practice of offsetting all currency
the time the final receipt of the currency payment obligations due between two
purchased is received with finality.8 Sources counterparties on a particular settlement
of settlement risk include internal date to calculate a single net payment in
procedures, intra-market payment patterns, each currency. If, for example, a Non-
the finality rules applying to local payment Dealer Participant executes twenty-five
systems, and the operating hours of the trades in dollar-yen with the same dealer,
local payment systems. all of which settle on the same day, bilateral
obligation netting will enable each
There are various methods by which institution to make only one netted
settlement risk can be mitigated. One of payment per currency. By establishing
these, payment-versus-payment (PvP) bilateral obligation netting agreements with
settlement, ensures the final transfer of a dealers, Non-Dealer Participants can thus
payment in one currency only if a final reduce the value of their payments exposed
to settlement risk and operational risk.
8
For additional information on settlement risk, please see the
Correct calculations as to netted payments
February 2013, Basel Committee on Banking Supervision
9
“Supervisory Guidance for Managing Risks Associated with the One example is CLS Bank International, a financial market utility.
Settlement of Foreign Exchange Transactions”, available at: CLS Bank International operates the world’s largest multicurrency
http://www.bis.org/publ/bcbs241.htm, (the “BCBS Paper”), as cash settlement system, mitigating settlement risk in respect of FX
well as the following: Foreign Exchange Committee, “Defining and transactions of CLS Bank’s members and their customers. CLS
Measuring FX Settlement Exposure,” in The Foreign Exchange Bank was established by the private sector, in cooperation with a
Committee 1995 Annual Report (New York: Federal Reserve Bank number of central banks as a PvP system to reduce the principal
of New York, 1996), and Foreign Exchange Committee, “Reducing risk arising from settlement of FX transactions.
FX Settlement Risk," in The Foreign Exchange Committee 1994
10
Annual Report (New York: Federal Reserve Bank of New York, The BCBS Paper promotes the use of financial market
1995). infrastructures that provide PvP settlement by dealers where
practicable.

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Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

are important, to ensure accurate netting calculations so that errors which can
settlement amounts and enhance efficiency occur due to manual calculation are
of operations. reduced. To protect against an improper
settlement of a net amount, Non-Dealer
Recommendation No. 14: Mitigate Participants should confirm such netted
Settlement Risk and Confirm Bilateral payment amounts with their Dealer Firms
Amounts at some predetermined cut-off time prior to
settlement.
Non-dealer market participants should
mitigate and manage settlement risk and Recommendation No. 15: Provide
confirm any netted payment amount with Settlement Instructions and Use Standing
their dealers. Settlement Instructions

Bilateral settlement on a gross basis can Non-Dealer Participants should always

involve large values and a high number of provide complete and accurate settlement
settlements, increasing settlement risk as instructions on a timely basis. Standing
well as the probability of settlement errors. settlement instructions (SSIs) should be
exchanged whenever possible. Non-Dealer
Non-Dealer Participants should ensure they Participants should issue new SSIs, as well
have a properly managed settlement as notify changes to SSIs to their dealers, in
function which includes staff who are well- a secure manner.
versed in settlement risk and the issues
associated with that risk and, wherever Settlement instructions should clearly
possible, arrange for bilateral obligation reference the following information:
netting and/or PvP settlement to reduce or
eliminate settlement risk.  The recipient's account name,
account address, and account
The operational processes around bilateral number;
obligation netting should be supported by  The name of the receiving bank, a
an enforceable legal agreement. This has SWIFT/ISO address and a branch
the benefit of entitling the parties to reduce identifier; and,
the number and size of payments between  The identity of any intermediary
themselves, thereby mitigating amounts bank used by the recipient.
exposed to settlement risk.
If an error occurs in the settlement process, Incomplete or inaccurate settlement
this can be costly. For example, if a Non- instructions heighten the risk of a disrupted
Dealer Participant fails to make a payment, settlement process, inflating processing and
it this may lead to an event of default, a compensation costs. Failed FX settlements
requirement to compensate the may also disrupt completion of an
counterparty, or otherwise generate underlying transaction.
additional expense. Settlement errors may
also cause a Non-Dealer Participant SSIs allow for complete trade details to be
institution's cash position to be different entered quickly, so that the confirmation
than expected. Non-Dealer Participants are process can begin as soon after trade
encouraged to automate bilateral obligation execution as possible. In contrast to
Foreign Exchange Transactions: Execution to Settlement Page 14
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

exchanging settlement instructions on a Recommendation No. 16: Request Direct

trade-by-trade basis, SSIs minimize the Payments
potential for incorrect or incomplete
settlement instructions. SSIs also Non-Dealer Participants should request
contribute to improved risk management direct payments when conducting FX
and greater efficiency, as repetitious transactions and recognize that third-party
manual inputting, formatting, and payments may significantly increase
confirming settlement instructions operational risk and potentially expose all
increases the cost of trading processing and parties involved to money-laundering or
heightens the opportunity for errors in other fraudulent activity.
settlement.
Third-party payments are the transfer of
Non-Dealer Participants should deliver SSIs funds in settlement of a FX transaction to
to their Dealing Firms at the time of the account of an entity other than that of
establishing the trading relationship. When the counterparty to the transaction. Third-
a Non-Dealer Participant changes its SSIs, it party payments raise important issues that
should provide as much lead time as should be carefully considered by a Non-
possible to its Dealing Firms so that they Dealer Participant requesting such a
can update their records before the date practice. The practice also heightens the
that the new SSIs become effective. Non- risk of financial loss; if the third-party
Dealer Participants should update their payment is directed to an incorrect
records promptly when changes to SSIs are beneficiary, the payment may be delayed or
received from their Dealing Firms. even lost. Third-party payments may also
create potential legal liability for the dealer
All SSIs should be delivered electronically, if making the payment.
possible, and preferably through
authenticated media, as electronic delivery Both Non-Dealers Participants and Dealing
minimizes manual error and is the timeliest Firms should be aware of the risks involved
method of delivery. In addition, with these third-party payments and should
authenticated media reduce the potential establish clear procedures beforehand for
for fraud. Changes to SSIs that cannot be validating both the authenticity and
delivered electronically should be delivered correctness of such requests. If a third-
in writing and signed by an authorized party payment must be requested despite
individual. the risks, Non-Dealer Participants should
provide dealers any written information
Although SSIs are preferred, they are not required to screen, internally review and
always available, and at times SSIs may not approve, and accurately make the third-
be appropriate for all trades. When SSIs are party payment (for example, the third-
not used, the settlement instructions may party’s receiving bank name and address,
be recorded at the time of trade execution. the third-party account’s name, address
These “exception” settlement instructions and account number, and the nature of the
should be delivered by the close of business third-party’s affiliation with the Non-Dealer
on the trade date for FX spot or at least one Participant).
day prior to settlement for FX forwards.

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Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

Additionally, third-party payment Recommendation No. 17: Perform Timely

instructions should be provided via Account and Portfolio Reconciliation
authenticated means. Instructions
otherwise provided, for example by phone Account reconciliation – the process of
or fax, should be reconfirmed by staff comparing expected and actual cash
independent of those providing such movements – should be performed as early
instructions. as possible. Portfolio reconciliation – the
process of comparing the terms of a firm’s
Account and Portfolio Reconciliation transactions with those of its counterparties
– should be performed on a periodic basis in
Process Description accordance with applicable law.
Account reconciliation occurs at the end of
the trade settlement process to ensure that The main objective of the account
a trade has settled properly and that all reconciliation process is to ensure that
expected cash flows have occurred. An expected cash movements agree with the
institution should begin reconciliation as actual cash movements in a firm’s currency
soon as it receives notification from its bank accounts. The cause for the difference
that payments have been received. If might be that wrong settlement or trade
possible, reconciliation should be information was captured or that a
performed before the payment system payment error has occurred.
associated with each currency closes. Early
reconciliation enables an institution to Failure to reconcile expected and actual
detect any problems in cash settlement and cash movements could result in an inability
resolve them by the settlement date. to recognize an under-funding of
transaction and/or an overdraft to the cash
Portfolio reconciliation can occur at various account. Overdraft charges may be
frequencies, depending on the size and imposed unknowingly when positions are
nature of an institution’s portfolio, and/or under-funded. Account reconciliation also
applicable regulatory requirements. serves as a main line of defense in detecting
Portfolio reconciliation is intended to fraudulent activity.
ensure that a firm’s books and records are
consistent with those of its counterparties, Non-Dealer Participants are encouraged to
and accurately reflect the occurrence of reconcile expected cash flows against actual
trade events such as novations, cash flows on a timely basis. The sooner
amendments and other trade-related reconciliations are performed, the sooner
activities. Periodic portfolio reconciliation an institution knows its true account
enables an institution to identify balances so that it can take appropriate
discrepancies relating to the terms of its actions to ensure that its accounts are
transactions and resolve any such properly funded.
discrepancies with its counterparties in a
timely fashion to avoid mismatches and The main objective of the portfolio
disputes. reconciliation process is to ensure that a
firm’s books and records are consistent
with those of its counterparties and reflect
the occurrence of any trade-related events,
Foreign Exchange Transactions: Execution to Settlement Page 16
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

such as novations and amendments, so that their payments. The counterparty that has
a firm understands its obligations under not received payment generally incurs the
transactions it has entered into with its costs associated with nonreceipt, including
counterparties. Failure to perform portfolio obtaining alternative funding on the
reconciliation could result in discrepancies settlement date and the added expenses of
in material terms of a firm’s transactions, exception processing and administering
such as valuation, notional value, payment payment, and as a result, may commence
or settlement dates, or relevant fixing rate. legal action to recover these costs.
Failure to perform portfolio reconciliation Compensation claims for nonreceipt, or late
could also result in non-compliance with receipt of payment, should be agreed and
applicable regulatory requirements. paid expeditiously.

Recommendation No. 18: Identify Accounting and Control

Nonreceipt of Payments and Submit
Compensation Claims in a Timely Manner Process Description
The accounting function ensures that FX
Management should establish procedures transactions are properly recorded to the
for detecting non-receipt of payments and balance sheet and income statement. If
for notifying appropriate parties of these transaction information is not recorded
occurrences. Escalation procedures should correctly, a company, client or portfolio's
be in place for dealing with counterparties reputation may be impaired if material
who fail to make payments. Parties that restatements of financial accounts are
have failed to make a payment on a necessary.
settlement date should arrange for proper
value to be applied and promptly pay Accounting entries are first booked
compensation costs. following the initiation of a trade. At the
end of each trade day, all sub-ledger
Non-Dealer Participants should attempt to accounts flow through to the general
identify, as early in the process as possible, ledger. Non-Dealer Participants should
any expected payments that are not reconcile their positions in a portfolio with a
received. Failure to notify counterparts of custodian, adviser and/or counterparties as
problems in a timely manner may lead them applicable. . Any discrepancies should be
to dismiss claims that are over a certain investigated as soon as possible to ensure
age, causing the institution to absorb that the institution’s books and records
overdraft costs. reflect accurate information. The
accounting area should ensure that
All instances of non-receipt of payment outstanding positions are continually
should be reported immediately to the marked to market until close-out – after
counterparty’s operations and/or trading which realized gains and losses are
units. When necessary, escalation calculated and reported.
procedures should be followed.
Management may wish to consider a Cash flow movements that take place on
limited dealing relationship with settlement date are also posted to the
counterparties who have a history of general ledger in accordance with accepted
settlement problems and continue to fail on accounting procedures. The receipt and
Foreign Exchange Transactions: Execution to Settlement Page 17
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

payment of expected cash flows at manner. Systematic and timely

settlement are calculated in an institution’s reconciliation of currency balances and
operations system. positions will help to ensure proper
accounting, Net Asset Value (NAV), and
Recommendation No. 19: Conduct Daily client reporting.
General Ledger, Position, and P&L
Reconciliation Recommendation No. 20: Conduct Daily
Position Valuation
Systematic reconciliations of 1) the general
ledger to the operations system of 2) Outstanding positions should be revalued to
trading systems to the operations systems market daily by staff independent of the
and 3) Non-Dealer participant portfolio trading function using independent price
positions to external parties should be sources This is particularly important for
performed daily. market participants that are active in less
liquid forward markets or in exotic options
Timely reconciliations will allow for prompt markets. Both trading and operations staff
detection of errors in the general ledger should be familiar with the procedures used
and/or sub-ledgers and should minimize for position valuation.
accounting and reporting problems. This
reconciliation will ensure that the general The daily revaluation of outstanding
ledger presents an accurate picture of an positions is an integral part of the control
institution's market position. When process; thus, it is important for the
problems are detected, they should be calculation to be correct. The identified and
resolved as soon as possible. Senior agreed upon rates and prices that are used
management should be notified of to create the position valuations should be
accounting discrepancies to review and periodically checked by an independent
update control procedures as needed. source. Staff independent of the trading
function should check that the rates and
Position reconciliations allow an institution prices used for end-of-day valuation are
to ensure that all managed positions are the representative of market rates. Position
same as those settled by operations. This valuations should be verified using
control is imperative when all deal entries independent sources such as market rate
and adjustments are not passed screens or broker/dealer quotations.
electronically between trading and
operations. When straight-through Illiquid markets present additional risk to an
processing is in place, the reconciliation institution because illiquid instruments are
ensures that all deals were successfully infrequently traded, making them difficult
processed from trading to operations, along to value. Often, it is difficult to obtain
with all amendments. Because a market quotes, thereby preventing timely
discrepancy in profit and loss between and consistent position monitoring.
trading and operations can indicate a Valuations may be distorted and risk may
difference in positions or market not be properly managed. In such
parameters (that is, rates or prices) all instances, a Non-Dealer Participant should
differences should be identified, seek to obtain quotes from other
investigated, and resolved in a timely counterparties active in the market.
Foreign Exchange Transactions: Execution to Settlement Page 18
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

Organizations may establish internal global confirmations, performing settlements, and

pricing committees to help assess and completing daily trading). Disaster recovery
address valuation issues. plans should identify requisite systems and
Marking-to-market reflects the current procedural backups, management
value of FX cash flows to be managed and objectives, staffing plans, and the
provides information about market risk.11 methodology for dealing with each type of
Senior management will be able to better disaster. Plans should be reviewed and
manage and evaluate market positions tested periodically.
when they know positions are accurately
valued on a daily basis. Backup sites that can accommodate the
essential staff and systems should be
Other established, maintained, and tested on a
regular basis. Particularly for operations,
Recommendation No. 21: Develop and Non-Dealer Participants should consider
Test Contingency Plans developing a backup site that relies on a
separate infrastructure (electricity,
Non-Dealer Participants should develop telecommunications, etc.) and that is in a
plans for operating in a “Business as Usual” separate location from the main site.
(BAU) environment in the event of an
emergency. Contingency or business Additionally, all Non-Dealer Participants
continuity plans (BCPs) should be should identify and practice alternative
periodically reviewed, updated, and tested. methods of trading, confirmation and
Where possible non dealer participants settlement communication with their
should store and maintain all of its BCPs in a counterparties. These methods should be
secure, central location that is globally secure in nature and may require the use of
accessible by firm personnel. electronic mail, PDF, fax or a recorded
telephone line (or a combination thereof) to
The key risk of a major disaster is that a ensure proper processing. During a
Non-Dealer Participant may not be able to disaster, a Non-Dealer Participant should
meet its obligation to monitor its market notify its counterparties of potential
positions, confirm or settle transactions. processing changes. Non-Dealer
Failure to be able to trade or settle Participants should also provide
transactions could subject the Non-Dealer counterparties with current contact
Participant or its counterparties to severe information for key personnel to ensure
financial hardship and non-dealer to that counterparties can contact the Non-
reputational repercussions. Dealer Participants in an emergency. These
contact lists should be reviewed and
Non-Dealer Participants should identify updated periodically as part of the overall
various types of potential disasters and BCP review.
identify how each may prohibit the Non-
Dealer Participant from satisfying its
obligations (that is, issuing and receiving

11
Group of Thirty, Global Derivatives Study Group, Derivatives:
Practices and Principles (Group of Thirty, 1993), p.19.

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Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

Recommendation No. 22: Ensure Service and other operational functions and should
Outsourcing Conforms to Best Practices not diminish the responsibility of the Non-
Dealer Participant to satisfy its regulatory
If a Non-Dealer Participant chooses to and contractual obligations.
outsource all or a portion of its operational
functions, it should ensure that its internal Controls should be in place to monitor
controls and industry standards are met. A vendors to ensure that internal standards
Non-Dealer Participant that outsources it are met. For example, trades should still be
functions should have adequate operational confirmed in a timely manner and proper
controls in place to monitor that the escalation and notification procedures must
outsourcer is performing the functions be followed.
according to agreed-upon standards and
industry best practices. Non-Dealer Participants should establish
procedures to periodically monitor and
A Non-Dealer Participant may choose to confirm that service providers are
outsource some or all of its operations performing functions according to agreed-
functions. However, outsourcing should in upon standards and industry best practices.
no way compromise a Non-Dealer A service level agreement should be in
Participant’s firm’s internal standards for place to clearly identify responsibility in the
confirmations, settlement and payments, case of a failure to meet obligations.
reporting requirements, and reconciliations

These Recommendations have been prepared by the Foreign Exchange Committee in order to
provide general information about foreign exchange [(including foreign exchange] derivative
transactions), and “best practice” recommendations for the purpose of the benefits specified in
the Introduction, and should not be treated or relied upon as legal, regulatory, tax, accounting
or investment advice. Many foreign exchange (including foreign exchange derivative
transactions) and their related activities are subject to laws, regulations, rules and directives
that can be complex and that vary depending upon jurisdictional requirements, entity types,
location, transaction type and other factors (“Legal Requirements”). In particular, many Legal
Requirements have been recently introduced, and continue to be introduced, modified and
refined in many jurisdictions as part of ongoing reform and strengthening of financial markets.
These Recommendations do not address or take into consideration all Legal Requirements that
may apply to Non-Dealer Participants. All market participants should understand the legal and
regulatory framework under which they operate in the foreign exchange and derivative
markets.
Foreign Exchange Transactions: Execution to Settlement Page 20
Recommendations for Non-Dealer Participants
The Foreign Exchange Committee

Acknowledgments

This document was originally completed in 1998 thanks to a task force of individuals
representing various institutions on the Foreign Exchange Committee and the Operations
Managers Working Group. That task force included:
Charles LeBrun Philip Scott Kathryn Wheadon
Bank One Bank of New York Bank of America

The task force for the 2004 revision included:

Joe Demetrio Laura Huizi Sandra Galarza

Bank of New York Federal Reserve Bank of New Bank of New York
York

Barry McCarraher Keith McDonald Michael Nelson

HSBC CSFB Federal Reserve Bank of New
York

Nancy Riyad Richard Rua Dan Ruperto

HSBC Mellon Bank Goldman Sachs

Rob Toomey Diane Virzera

Federal Reserve Bank of New Federal Reserve Bank of New
York York

The task force for the 2015 revision included:

Adnan Akant Martha Burke Jason Cronin

Fischer Francis Trees and Wells Fargo Wellington Management
Watts Company LLP

Victoria Cumings Michael Debevec Pamela Hutson

CLS Blackrock US Bank

Tahreem Kampton Lisa Kraidin Richard Maling

Microsoft Federal Reserve Bank of State Street
NewYork

Ken Rozycki Christopher Vogel Olivia Wang

Brown Brothers Harriman Blackrock Morgan Stanley

Foreign Exchange Transactions: Execution to Settlement Page 21

Recommendations for Non-Dealer Participants
The Foreign Exchange Committee www.newyorkfed.org/fxc

Recommended Reading

"Guidelines for the Management of FX Trading Activities.” New York: Foreign Exchange
Committee, 2010.

“Management of Operational Risk in Foreign Exchange.” New York: Foreign Exchange

Committee, 2013.

Bank for International Settlements. Triennial Central Bank Survey of Foreign Exchange and
Derivatives Market Activity 2013. Basel: BIS, 2013.

“Final Report on Foreign Exchange Benchmarks.” Basel: Financial Stability Board, 2014.

“Global Preamble: Codes of Best Market Practice and Shared Global Principles.” Tokyo:
Australian Foreign Exchange Committee, Canadian Foreign Exchange Committee, ECB’s Foreign
Exchange Contact Group, Hong Kong Treasury Markets Association, London Foreign Exchange
Joint Standing Committee, New York Foreign Exchange Committee, Singapore Foreign Exchange
Market Committee, Tokyo Foreign Exchange Market Committee, 2015.

“Fair and Effective Markets Review Final Report.” London: Bank of England, Financial Conduct
Authority and HM Treasury, 2015.

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Recommendations for Non-Dealer Participants