Foreign Exchange Transactions: Execution to Settlement Recommendations

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 ...... 6 Description 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

Foreign Exchange Transactions: Execution to Settlement Page 2 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). Foreign Exchange Transactions: Execution to Settlement Page 2 Recommendations for Non-Dealer Participants The Foreign Exchange Committee

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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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. Foreign Exchange Transactions: Execution to Settlement Page 2 Recommendations for Non-Dealer Participants The Foreign Exchange Committee 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: and , 4 For related guidance on this issue please see the letter to market respectively. participants on the FX Committee’s website. Foreign Exchange Transactions: Execution to Settlement Page 4 Recommendations for Non-Dealer Participants The Foreign Exchange Committee

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

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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. Additionally, Non-Dealer Participants should 5 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 party will send out its own paper 6 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 Recommendations for Non-Dealer Participants The Foreign Exchange Committee

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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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 “Supervisory Guidance for Managing Risks Associated with the 9 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 Annual Report (New York: Federal Reserve Bank of New York, 10 The BCBS Paper promotes the use of financial market 1995). infrastructures that provide PvP settlement by dealers where practicable. Foreign Exchange Transactions: Execution to Settlement Page 13 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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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.

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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. Foreign Exchange Transactions: Execution to Settlement Page 19 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