ACI BRIEFING11 edit2:Layout 1 · Derivatives Markets Contract 4% BIS .....08 Central Bankers Ratify Basel III Standards....10 FXC Updates Documentation .....11 News from the Associations.....12

ACI BRIEFINGNEWS FROM THE FINANCIAL MARKETS ASSOCIATION

http://www.aciforex.org

ACIFXC Launched

Message from the President ..........................01ACIFXC Launched..............................................01FX market little affected by the Financial Crisis but feels the breath of regulation...02ACI Hungary 50th ACI World Congress .....04ACI Europe Reports ..........................................05ACI Holds New York Reception.....................052010 Summary of Activities in Asia.............06

ACI Visits IMF, World Bank...............................06New Market Experts Committee In Place .07Confirmation of Trades ....................................07ACI Web.................................................................08Derivatives Markets Contract 4% BIS ......08Central Bankers Ratify Basel III Standards....10FXC Updates Documentation .......................11News from the Associations...........................12

Messagefrom thePresident

FOREWORD

Dear Reader,The financial markets are at aturning point – and so is ACI. Thepast year was a busy one for ourindividual-based trader’s associa-tion and we, the Executive Boardand its Committees, implementeda lot of initiatives, the fruits ofwhich shall be seen in the near fu-ture.ACI signed a memorandum of un-derstanding with CISI – TheChartered Institute for Securities& Investment. The MOU recog-nises both the ACI Operations andDealing Certificates as one unit ofthe CISI’s Investment Administra-tion Qualification.Recently the UK’s FSA – Finan-cial Services Authority – putACI’s Dealing Certificate andDiploma on its recommendationlist. An important step which weshall seek to replicate during 2011with other regulators and centralbanks.To support our industry in theseheavy days of impending regula-tion the Executive Board not onlyresponded to some of the consul-tation papers by the various com-missions but also instigatedcontact with officials from severalregulatory bodies around theglobe. Contacts/visits were madewith the European Commission,several Central Banks, to theSAFE (State Administration For-eign Exchange) in Beijing, to theFederal Reserve Bank of NewYork, the IMF and the WorldBank in Washington, the FSA inLondon and others.

Q1 2011 VOL 17, ISSUE 105 ISSN 1469-2031

Contents

ACI Head Office: 8 rue du Mail, F75002 Paris, Tel: +33 1 42975115 / Fax: +33 1 42975116

The ACIFXC (ForeignExchange Committee)was launched in NewYorkon Monday 15 November2010 during the ACI 2010Council Meeting.Stéphane Malrait, SocieteGenerale, MD GlobalHead of e-Commerce be-came the first electedChair of the committee,whilst David Woolcock,Senior Director, Head ofBank Sales at FXall wasconfirmed Vice Chair.

The new group will meet six times a year andhas the following mission statement: • To inclusively represent the entire profes-

sional FX Market, including in the member-ship of ACI, all Professional MarketParticipants (PMP’s), who, based upon theprinciple of personal integrity, will individ-ually uphold the values of The Model Code.

• The committee to be focused on, and com-prised of, FX experts who will support boththe Executive Board and Regional ACI’sand ensure that the views of the profes-sional FX community are heard at the high-est levels, in co-operation with otherassociations that have an FX voice whenapplicable.

• ACIFXC will work in concert with regula-tors and other foreign exchange committeesto promote a common global, orderly andtransparent FX market and to lobby on reg-ulatory issues as required. To recommend

best practices and changes to The ModelCode as and when necessary from a profes-sional FX market perspective.

• The ACIFXC will fully represent currentand future trading styles and executionchoices available to the FX market profes-sionals and will actively facilitate the de-velopment of regional foreign exchangemarkets and their integration into the globalmarketplace.

A meeting was held in London on Thursday20 January, the next is in Moscow on 17March.Stéphane Malrait is Managing Director andGlobal Head of E-Commerce at Societe Gen-erale. Based in London, Stéphane joined Soci-ete Generale in August 2007 to lead the banke-commerce initiatives across Credit, Rates andForeign Exchange products and continue thebank effort to develop a cross-asset ecommercestrategy. Previously, Stéphane has worked at

ACI BRIEFING IS PUBLISHED BY:

PROFIT & LOSS IN THE CURRENCY & DERIVATIVE MARKETS

®

continued on p.2 �


ACIFXC

ACI Briefing | Q1 2011 2

ACI BRIEFING I NEWS FROM THE FINANCIAL MARKETS ASSOCIATION I http://www.aciforex.org

A missing milestone was the initiative tohold a trader’s reception for New Yorkbanks, which took place in November.The next steps will be to re-install anACI USA association as well as to openan ACI Representative Office in China.Our goal shall be maintaining a finger onthe pulse of activity. In response to the ongoing market chal-lenges, for example Dodd Frank, EUhedge fund regulation, MiFID, Marketsinfrastructure, to name just a few, ACIhas re-instigated an ACI Foreign Ex-change Committee. The ACIFXC wasofficially inaugurated on November 15in New York and its membership in-

cludes well-respected and well-knownmarket experts.That said, a lot remains to be done. Astrong focus for the Association will be inadjusting our certification program to thechanging environment (Asset & Liability,Liquidity, to name just two areas). Thevarious committees will actively followthe development of the regulatory infra-structure and we shall promote our activi-ties all over the world to show theregulators what ACI has to offer and itsvalue to the industry. ACI continues to grow in its influence,particularly encouraging was the strongincrease of members by ASSIOM ForexItaly – something we see as a strong com-

mitment to our Association.ACI will hold its 50th World Congressfrom May 26– 28 in Budapest and Istrongly recommend not missing this op-portunity to share your ideas, thoughtsand opinions with your fellow members.At the Congress, ACI’s working groupswill discuss the latest developments inforeign exchange (Dodd Frank) andmoney market and liquidity (Basel III) inaddition to many other interesting panels.Registration is open - just take a look atwww.acibudapest2011.hu or throughACI’s website.

Manfred WiebogenPresident ACI

JPMorgan Chase for ten years based inNew-York and London, working in differ-ent roles in global FX e-commerce businessmanagement and cross asset e-commerce

technology. Stephane is also a board mem-ber for several e-trading market initiatives. David Woolcock is an experienced trader,with a broad knowledge of foreign ex-change, fixed income and related matters

gained through a va-riety of roles incommercial and in-vestment banking.David has been fo-cused on e-businessin sales, strategy andproduct develop-ment for e-FX since1999; and is cur-rently at FXall asSenior Director,Head of Bank Saleshaving been with thecompany sinceMarch 2004.

MEMBERS:Stefan Hamberger

- Commerzbank - Frankfurt Stephane Malrait

- Societe Generale - London Morgan McDonnell

- RBC Dexia - London David Hudson

- JPMorgan - London Niklas Karlsson

- Danske Bank - Copenhagen Sergey Romanchuk

- Metallinvestbank - Moscow David Woolcock

- FXall - London Nigel Brandon-Bravo

- Gain Capital - London Anne-Maria Rothenstein

- Adsatis - London

The BIS recently confirmed the FXbusiness as being the world’s largest fi-nancial market. The daily traded FXvolume increased from USD 3.3 trillionin 2007 to USD 4 trillion in April 2010.This represents a 20% gain, which wasmarkedly less than the 71% increaseobserved between 2004 and 2007.

The FX market is larger than all the otherfinancial markets combined. More impor-tantly, it enables liquidity to be efficientlydistributed around the globe and remains

essential for a sustainable economicgrowth. It is highly liquid and transparentand FX trading transcends geographicaland time zone boundaries – nearly trad-able seven days a week.

Drivers

The increase in turnover was driven by a48% growth in Spot transactions, whichrepresents 37% of the FX market andreached USD 1,5 trillion. Another stagger-ing increase was noted in the outright for-

ward segment (+31%), whereas thegrowth in the largest segment of FXSwaps was flat. Meanwhile, a marginaldecrease of 2% was registered in FX Op-tions.Members of the ACIFXC (ACI ForeignExchange Committee) summarised thedevelopment as a significant increase ofclient flow in Europe and Asia. Clientsare looking at more counterparties thanbefore. They also notice more demandsfor emerging market currencies and bet-

ACIFXC Launched. Continued from p.1


MANFRED WIEBOGEN AND EDDIE TAN OFFICIALLY INAUGURATE THE ACIFXC

FX market little affected by the Financial Crisis – but it feels the breath of regulation

Message from the President. Continued from p.1



ter execution using e-commerce. Addi-tionally the FXC analysis suggests thatspeculative FX business is on the de-cline . The tendency in the FX marketsstill is for hedging but even more forusing FX as an investment vehice. Manyhedge funds, pension funds, large corpo-rates or insurance companies discoveredFX as an asset class in their portfoliowhilst pure trading for own accounts isdiminishing.

Cross border transactions

The BIS survey also shows that the FXmarket became more global with crossborder transactions representing 65% ofdaily trading activity. This may be due toan increase in cross border trade amongstcountries but also to the growing numberof investors considering FX as an assetclass and are investing in the fast growingeconomies. The US dollar remained the dominant cur-rency, with 84,9% of all transactions. Theeuro’s share rose to 39% from 37%, theJapanese yen gained 1,8% to 12,9% andthe biggest decline was in the Britishpound. Moreover, it is interesting to notethat amongst the emerging countries, sig-nificant increase were seen in the TurkishLira, Korean Won, Brazilian Real and theSingapore Dollar.In terms of currency pairs, EUR/USD re-mains dominant with 28%, followed atsome distance by USD/JPY at 14% andUSD/GBP (9%). The United Kingdom(37% market share) and the US (18%market share) still host the worlds’largest foreign exchange markets. TheUK’s market share increased by 2%whereas that of the US was pretty muchflat. These countries are followed byJapan (6%), Singapore (5%) andSwitzerland (5%).Trading originating from non-dealers andclassified as other financial institutions,grew by 42% to USD 1.9 trillion and be-come the highest contributing source intoday’s FX Market. This category, mainly

includes central banks, hedge funds, mu-tual funds and even smaller commercialbanks. Meanwhile, trading between re-porting dealers grew at a slower pace, by11% to $1.5 trillion. Reporting dealers isdefined as those financial institutions thatactively participate in local and global FXmarkets.

Market trends

We as ACI agree with CLS’s (ContinuousLinked Settlement) summary in the keyFX market trends in the foreseeable fu-ture:Risk and liquidity will play an importantrole. The regulatory environment ischanging and will influence the clearingof derivatives. The trend further will betowards trade repositories and price trans-parency – but we have to state, that theFX business already provides the upmosttransparency in financial markets. Riskmitigation remains at the top of the banks’agenda whilst the cost of liquidity has andwill increase further.There will be a further need for marketconsolidation. But e-commerce invest-ment will continue to climb and we fore-see some concentration in the scalebusiness. That said, niche players will stillfind roomto succeed, in particular in theretail business.Costs and capacity will stay on the agendain FX as well. Assuming ongoing capacityand a robust infrastructure the continuingdemand for lower costs will remain. Auniversal spread compression will in-crease these cost pressures.Despite these developments mentionedabove we agree on the prospects for fur-ther growth from the key segments ofprime brokerage, algo and retail business.Continued growth may be seen globally –in emerging market currencies as well asin the more traditional ones.

Regulation

In some sense the FX markets have tobe seen different to the rest. The market

of spot, forwards and swaps is qualita-tively different to the derivatives mar-kets. The latest BIS survey confirmedspot and swaps (short FX exchange ormainly liquidity exchange) account for82.5% of the overall market volumewhilst outright forwards, cross currencyswaps and FX options are just occupy-ing 17.5% Even this figure is downfrom 18.2% in 2004! Whatever mightcome up on regulation – I am definitelyconcerned by the possibility of over-regulation:We have to avoid the danger of concentra-tion risk by mandatory clearing. During the crisis, the FX market became acritical source of liquidity and funding forparticipants through the FX swap mecha-nism – which was absolutely supportivein terrible times.Much of FX is used in carrying out mone-tary policy. The FX market is needed – inparticular larger amounts – by CentralBanks and Treasury departments interven-ing in the markets to stabilise and balanceat bad economic market conditions.The non-commercial banks segment gen-erated for the first time more volume thanreporting banks. This indicates that theFX market is increasingly shared by non-regulated counterparts.Finally (besides others) we should not for-get, the majority of the FX business is ex-tremely short dated and the market is veryliquid.The Dodd Frank Act and/or the EU HedgeFund regulation cast a cloud over theworld’s oldest financial product. We asACI The Financial Markets Associationand other sister associations are con-cerned about any possible quick shot ofregulation which could lead to new mar-ket turbulence.

Manfred WiebogenPresident ACI The Financial Markets Association

Paris/Vienna, 25 January 2011

Regulation. Continued from p.2



It was in 2007 when ACI Hungary gotthe vote for organising the 50th ACIWorld Congress and it is now only a lit-tle more than four months to go beforethe Congress kicks off on 26 May 2011.ACI Hungary did not waste any time andpreparations for the Congress started atthe end of 2007. The Organising Commit-tee was formed and headed by LeventeFülöp from the Hungarian DevelopmentBank. The 47th World Congress in Vienna in2008 gave a good opportunity to startmarketing our Congress. The location andvery good cooperation between the twoAssociations helped us to launch our cam-paign. During this year our main task wasto secure the necessary sponsorship fromthe local banks first. The Magyar NemzetiBank (the central bank of Hungary) isstanding firmly behind the Congress. Bythe end of 2010 we had one platinumsponsor, Deutsche Bank. There are threeDiamond sponsors, Erste Bank, UBS andOTP Bank. We have the MKB as a Goldsponsor. There are two media partners,Profit and Loss magazine and the WallStreet Journal.The signal to accelerate preparationscame when ACI Hungary received theflag of ACI – The Financial Markets As-sociation in March 2010 in Sydney fromACI Australia at the end of the 49thWorld Congress.The major issue was to set up a high levelbusiness program. As this will be the 50thWorld Congress, the Organising Commit-

tee decided thatthe second day,Saturday 28thMay, will be al-most fully dedi-cated to ACI.Additional to theGeneral Assem-bly, we will hearreports from thenew Foreign Ex-change Commit-tee, and theMoney Marketand LiquidityCommittee. Wewill bring to Bu-dapest as manyformer ACI global presidents as possibleto celebrate this anniversary and to dis-cuss how they can see the past, presentand the future of ACI.The Congress will kick off in the eveningof 26 May, Thursday, in the SYMA Sportsand Event Centre where the Conferenceand the Exhibition is located. The Open-ing Ceremony will be held in the Exhibi-tion Area, providing possibilities for theparticipants to meet and enjoy some enter-tainment. Friday sees a busy schedule on the busi-ness program. After the Opening Remarksfrom Manfred Wiebogen, president ACI –the Financial Markets Association andIstván Gondi, President of ACI Hungarywe will hear a keynote speech from An-drás Simor, Governor of the Magyar

Nemzeti Bank.The introductoryspeech byAlexandre Lam-falussy, formerGeneral Managerof the Bank forInternational Set-tlements and for-mer President ofthe EuropeanMonetary Insti-tute will be fol-lowed by a paneldiscussion frommembers of East-ern EuropeanCentral Banks onthe topic of “The

Euro. Past, present… and future?”After the lunch break we will hear akeynote speech by Nouriel Roubini, Pro-fessor - New York University, Chairman –Roubini Global Economics. The afternoonpanel will discuss “The world economicsituation in 2020. Tendencies and powerrelations” with panellists includingRoubini. Arnab Das also from RoubiniGlobal Economics, and Anrás Inotai, di-rector, Doctor of Economic Sciences – In-stitute for World Economics of theHungarian Academy of Sciences will alsoparticipate. The afternoon will be con-cluded by a speech from Robert Thomson,Editor-in-Chief, Dow Jones and Manag-ing Editor – The Wall Street Journal.Saturday will be an ACI day. The topicswill cover challenges regarding FX, BaselIII and Liquidity. The morning programwill commence with “What kind of FXmarket going forward after Dodd Frankand EU hedge Fund regulation?” HervéFerhani, Deputy Director Monetary andCapital Markets, IMF will introduce thetopic which will be discussed by membersof the ACIFXC Foreign Exchange Com-mittee). The is will be followed by theGeneral Assembly of ACI as well a pres-entation and discussion about the recentbanking crisis (led by Manfred Kunert,Honorary Member ACI) will follow. Fi-nally, “Basel III Liquidity Rules - Howwill Treasury's bank-wide role be ef-fected?” will be presented by Dr. HannesEnthofer, Finance Trainer Consulting, anddiscussed amongst a panel comprised of

ACI Hungary making the final preparations for the50th ACI World Congress

THE ACI HUNGARY ORGANISING COMMITTEE

ACI HUNGARY RECEIVES THE ACI FLAG continued on p.5 �



representatives from the European CentralBank, Crédit Agricole and DeutscheBank. The closing speech of the Con-gress will be by Claudia Segre, GeneralSecretaryand the closing speech of theCongress will be by Claudia Segre, Gen-eral Secretary – Assiom Forex, Credito

Emiliano, a symbolic transition of Con-gress “From Budapest to Dubai: Explor-ing new opportunities in Islamic finance”.The aforementioned speakers are alreadyconfirmed and we are still working onmore to offer delegates as high a qualityprogram as possible.There are four and five star hotels avail-

able in the centre of the city to enjoy thesights and only a short bus ride from theCongress Centre.

The early bird registration is still on sohurry up to book your place.You can find all the details on our web-site: www.acibudapest2011.hu

ACI took the opportunity afforded by theCouncil meeting being in New York tohold a reception for local traders in No-vember. More than 100 came along to thereception, for some it was an opportunityto meet again after a hiatus since ACIUSA disbanded some years ago.What was heartening for ACI’s officialswas that the message from the receptionwas clear – nostalgia has its place, butthere is a real desire to see ACI USA re-formed for the future. This reformation is,of course, one of the objectives for ACI in2011, as we seek to build our influenceand presence in this huge financial centre.

ACI Holds New York Reception

NETWORKING IN NEW YORK

The recent ACI Council meeting tookplace at the offices of Natixis in New York,the bank kindly hosting the ExecutiveBoard and Regional meetings the previ-ous day. At the meeting, an update wasprovided on the status of ACI Europe.

The mapping of members :Members in charge of working groups havebeen mapped in every European country,and different commissions can now ex-change topics and documents, directly orthrough the ACI website that has been en-hanced with this specific purpose in mind.We realised that in the current environ-ment, driven by a general push towardsmore market regulation, it is critical toknow what the regulators are planning,and to be part of the industry network thatparticipates in the discussions.In that regard the cooperation between Euri-bor ACI working groups (that now workunder the ACI Europe umbrella) and otherspecific ACI Europe working groups, hasbeen fruitful, and we have been representedin several meetings with G20 regulators in-cluding Jacques de Larosière as well as theEuropean Commission (the so-called

“Barnier” commission), and more recentlywith the Federal Reserve Bank of New York.Reports of these meetings and presenta-tions made by our ACI group memberscan be found on the association’s websiteat www.aciforex.org.

Euribor ACI :Euribor ACI Working Groups have beenintegrated into ACI Europe. These groupsare essential to ACI, and they represent astrong asset for the Association. Reportsof the Working Group meetings have beenput on the association’s website.Following the resignation of Godfried DeVidts from the Presidency of Euribor ACI,a new President will be elected at a meet-ing scheduled for February.

Improvements in the website:We have launched a specific area in thewebsite for members of each workinggroup to access the reports and presenta-tions created by similar Working Groupsin other countries. The entire database isupdated by the ACI Administration teamin Paris, so it is important that all relevantinformation is forwarded to them by the

National Associations.They have been put online, accessiblethough a system of password that can begiven either to each group member, or toall ACI members. This means it is noweasier for every European country to fol-low events in other European financialcentres, and to contact people in thosecentres that may be facing the same prob-lems or working on the same topics.The log of former meeting, reports, or callsis being put on the web little by little, andfiled according to each topic. The agendaof meetings between ACI members andregulators is also online, as well as shortcall reports following these meetings.

Education:The global financial crisis has reinforcedthe focus on education and ethics, topicson which ACI has always been pro-active.We want to take advantage of this to con-tinue our effort, and try to market ACI asa “reference point” for financial markets.We need to market our professionalismand competence, and seek to be includedin as many central bank or regulatory

ACI Europe Reports

ACI Hungary. Continued from p.4




working groups as possible, in order togive our opinion on our areas of expertise.We need to market the ACI Certificates,and push for more candidates in morecountries to take the exams, in connectionwith ACI’s Board of Education.

Communication : Monthly calls :Since the beginning of the financial cri-

sis ACI Europe has organised monthlyconference calls to enhance communi-cation about the situation in the differ-ent markets; to update membersregarding the discussions with regula-tors; and events in the different Euro-pean associations, the organisation oflocal events.It is our intention to continue these con-ference calls in the future.

ACI Landmarks :We are working on the definition of anACI Index that we will try to market andget accepted by the trading community.The index will be general (including severalmarkets) but also easy to compute, and willbe monitored by a group of scholars andpublished daily or weekly. A specific ideahas been put forward during the meetingsand will be discussed further in Q1 2011.

Following the Executive Board andCouncil meetings in New York duringNovember and the subsequent meetingwith the Federal Reserve Bank of NewYork, ACI’s President Manfred Wiebo-gen and Managing Director Jean-PierreRavisé visited Washington DC to meetwith officials from both the InternationalMonetary Fund and the World Bank.The meetings marked the first occasionsince ACI was formed in 1955 that seniormembers of the Association have met withofficials from the IMF and World Bank.

ACI's President Manfred Wiebogen, theVice President Eddie Tan, Board of Edu-cation Chair, Christoph Niggli, and theChair of ACI’s Committee for Profession-alism, Teruo Tanaka, met November 17thwith the New York Fed’s Patricia Mosser,SVP and Anna Nordstrom, Director For-eign Exchange, to discuss recent marketand regulatory developments. A pointraised was ACI's concerns on over-regula-tion (Dodd Frank Act and Basel III)which could massively mislead and hurt

ACI Visits FRBNY, IMF, World Bank

HERVEY FERHANI

I am pleased to report that the ACIAsia Secretariat successfully relocatedto Singapore in January 2010, and abranch office has been established.The most significant event for Asia in2010 was the successful hosting of the49th ACI World Congress in Sydney byACI Australia from 25-28 March 2010. The year has also seen significantprogress in building an educational plat-form and roadmap for the member Asso-ciations in Asia, with the collaborationbetween ACI Asia, ACI Singapore and theSingapore Management University seeingover 240 participants attending its 7courses, and a further 120 participantstaking the highly successful Non-Deliver-able Products Course developed by ACISingapore. ACI Australia has continued todevelop and expand its highly successfulDealing Simulation Course with 185 par-ticipants attending the course globally.2010 was also a year when our memberassociations did much to give back to So-ciety. ACI New Zealand co-hosted withThomson Reuters Charity Golf Classic inTaupo from 24-26 September 2010, whileACI Australia hosted a Charity Golf Dayfor the benefit of the St Edmunds Special

Needs School in Sydney. On 9 July 2010,ACI Singapore hosted its Annual CharityGolf event raising SGD750,000 (aboutUSD580,000) for various hospitals andcharities in Singapore. ACI Indonesiaalso made a contribution to the orphanageAl-Futuwwah, in Jakarta, during the year.To promote ongoing interaction among

our member Associations, ACI Malaysia& ACI Singapore met in Kuala Lumpurduring the weekend of 30-31 July 2010and played out a series of games in a spiritof friendly competition and camaraderie.Over 60 member-participants from Singa-pore made the trip to Kuala Lumpur andwere warmly hosted by ACI Malaysia.

2010 Summary of Activities in Asia

ACI Europe. Continued from p.5




financial markets in the future. The dis-cussion then moved to the advantages ofACI's certification program and its ModelCode. The visit was well received andwill we will continue to exchange our ex-pert views going forward.At the IMF ACI met with Hervey Ferhani,Deputy Director of the Monetary and Cap-ital Markets Department and two of his col-leagues, Karl Habermeier and Simon Gray.ACI’s President explained ACI’s mission,including the work of the Committee forProfessionalism and Board of Educationand further stressed the need for a revival of

a National Association for the US.At the meeting it was agreed that ACI andthe IMF will cooperate through further dis-cussions and the exchange of ideas on ac-tivity within the financial markets, includingthe structure of the market, professionalethics and a code of conduct for markets, aswell as an education programme. Wiebogentold the IMF officials of the intention of theUK’s Financial Services Authority (FSA ) toplace ACI’s Dealing Certificate Diploma ontheir recommended examinations list.It was also agreed to include officialsfrom the IMF in ACI’s business meetingsgoing forward.

At the World Bank ACI met IsabelleStrauss Khan and two of her colleaguesRobert Hunt and Robin Pernia. AgainWiebogen and Ravisé explained ACI’smain goals, including its ambitions for itsvarious Working Groups .Following the meeting, there would ap-pear to be good opportunities for co-oper-ation in education projects, especially incountries where the World Bank is active,such as Armenia, Qatar, Libya, Syria andAlgeria. The recognition by the FSA waswarmly received by the World Bank andwas seen as a key factor in it being able topromote ACI certification.

International supervisory authoritiesand major market participants met atthe Federal Reserve Bank of New Yorkin late January to discuss ongoing ef-forts and future priorities for improv-ing the infrastructure and reducing riskin OTC derivatives markets.The meetings between the OTC Deriva-tives Supervisors Group (ODSG) andmajor market participants have served asa venue for open dialogue and collectiveaction to effect practical improvements inthese global markets and have focusedupon the post-trade space.Regulatory interest in post-trade process-ing has grown significantly over the pasttwo years and one of the current focusareas is the reporting and confirmation oftrades, possibly to trade repositories, assoon as possible.

ACI’s Model Code states that one of the“essential” risk controls available to insti-tutions dealing in the financial markets isthe independent confirmation of tradesbetween the back offices of the respectivecounterparties. It further notes while con-firmations continue to be an essential riskcontrol in bilaterally-negotiated and set-tled transactions, the introduction ofmulti-lateral trading and clearing in someOTC instruments has led to confirmationsbeing replaced by the automated matchingof transactions.The Model Code further states that bro-kers should confirm all transactions toboth counterparties immediately by an ef-ficient and secure means of communica-tion, and whilst it notes that in somemarkets it is not uncommon for one partyto send out confirmations, this practice is

not recommended due to the operationaland legal risks that may arise.The rise of automated trading systems andcentral clearing counterparties (CCPs) hasmeant that in recent years, trades executedor reported to these venues have been au-tomatically matched. The Model Codestates that provided the trading system orCCP is independent to the counterparties,that matching takes place without unduedelay over a system that is efficient, se-cure and robust, and that the counterpar-ties have efficient procedures in place todeal with unmatched transactions, thenconfirmations need not be exchanged.Issues pertaining to the back office, pay-ments and confirmations are dealt with inChapter III of the Model Code. The codeof conduct can be downloaded for free at222.aciforex.org.

Committee For Professionalism: Confirmation of Trades

The new ACI Market Experts Committee (MEC) is now inplace and commenced its work in January. The ACI Boardof Education has nominated the members for this new com-mittee and is proud to welcome:

- Aladin Al Khatib, Al-Hilal Bank, ACI UAE- David Almeida, BNY Mellon, US- Salman Hyder, National Bank of Fujairah, UAE- Ton Kennedie, AXA Bank, ACI Belgium- Sameh Khalil, CI Capital Asset Management,

President of ACI Egypt- Mohammed Madhoun, Volksbank, ACI Austria- Peter Nettekoven, Commerzbank, ACI Germany- John O’Farell, UniCredit Bank, ACI Ireland (former President)- Albert Prendiville, Commerzbank Europe, ACI Ireland- John Shine, Allied Irish Banks, ACI Ireland- Paul Tancred, Ulster Bank, ACI Ireland- Josephine Tham, OCBC, ACI Singapore

As a gateway between ACI’s market practitioners and the ACIeducation programme, the MEC will play a critical role in main-taining the integrity and quality of ACI’s suite of examinationsand exam preparation. The MEC is a sub-committee to the ACIBoard of Education similar to the ACI Exam Appeal Committee.The Chairman is Alan Malone from Allied Irish Banks GlobalTreasury who is also a member of the BOE.Each MEC member is a recognised market expert and primarilyresponsible for reviewing ACI exam syllabi, the new exampreparation materials and the test question databases related tohis/her field as well as for proposing new exam test questions.Additionally he or she will advise the BOE and the CFP on latestmarket developments and current best market practice.If you also want to become an “MEC” and contribute to the pro-fessionalism of our young market practitioners please visitwww.aciforex.org where you’ll find an application form provid-ing you with more information on the qualification requirementsand your duties as a MEC.

Board of Education: New Market Experts Committee In Place

FRBNY. Continued from p.6



Three years ago in Hong Kong a newWebsite design was presented to ACI’sCouncil: a design that incorporatednew colours, pictures, was more inter-active, with more internal and externalinformation available.The Web is ACI’s window. The Web ad-dress, aciforex.net, appears in all the As-sociation’s documents and could beconsulted by professionals, students, jour-nalists and also regulatory authorities.Now there are not only more pictures butmore boxes that can be opened by click-ing on them. These boxes open files, list

of documents, rates, internal and externalnews announcements. In 2010 the Mar-kets Topics section of the website regis-tered more than 1000 articles. Thomson Reuters’ rates will be availableon a running ticker as well as the dailyEuro fixing delivery by European Bank-ing Federation.New Information Now AvailableCERTIFICATE REGISTRY: first pageblue button left column, the certificate de-livery updated list by names, certificates,years, country.CALENDARS TODAYS FROM FORE-

CAST: first page blue button left columnyou get a world daily event calendar.IntranetACI’s Intranet is updated on daily basisand everyone can open it: https://doc.aci-forex.orgUser name: visitorPass word: 2010 But now a link with the ACI Website isalso available.Useful information includes Councilmeeting minutes, Council members,Working Group members contact, eventspictures, and more details…

New on the Web

The global over-the-counter derivativesmarket contracted 4% to $583 trillionin the first half of 2010, compared witha 2% rise in the second half of 2009, ac-cording to survey results from the Bankfor International Settlements (BIS).Positions in foreign exchange derivativescontracts increased, rising 8% in the firsthalf of 2010 to $53 trillion. The amountoutstanding in US dollar-denominatedcontracts increased by 11% and euro con-tracts dropped by 2%, while Swiss franccontracts increased by 23%, the Basel,Switzerland-based BIS says.The rise in currency-related derivativeswas in contrast to the contraction ofamounts outstanding in credit defaultswaps, from $32.7 trillion at the end of2009 to $30.3 trillion at the end of June2010. This was largely due to termina-tions of existing contracts.Outstanding amounts of OTC interest ratederivatives, the biggest category of pri-vately traded derivatives, stayed at $452trillion in the first six months of 2010,after increasing by 3% in the previous sixmonths.“In the first half of 2010, growth inamounts outstanding was subdued or neg-ative in all risk categories,” the BIS saysin a statement.The latest BIS data comprises the regularsemi-annual OTC derivatives statistics atthe end of June 2010 and the results of thesecond part of the Triennial Central BankSurvey of Foreign Exchange and Deriva-tives Market Activity. The triennial survey covers trades re-ported by 400 market participants across47 countries between 2007 and 2010 and

serves as a benchmark for the semi-annualsurvey, which is based on data from 59dealers in the G10 countries and Switzer-land.The 2007 and 2010 BIS surveys bracket athree-year period of extreme growth inOTC derivatives that peaked in the firsthalf of 2008. A decline in the amountsoutstanding of derivatives since the end of2008 is due in part to trade compression,the BIS says.Sharp asset price movements followingthe bankruptcy of Lehman Brothers inSeptember 2008 resulted in a sharp rise ingross market value in the second half of2008. Gross market values declined againas asset prices moved closer to their pre-crisis values, but increased in the first halfof 2010 as markets went through anotherbout of turbulence.Overall, the OTC market has grown 15%during the last three years. This corre-sponds to an annualised compounded rateof growth of 5%, however, compared to32% annually in the period 2004–07.Gross market values for existing OTCcontracts rose by 122% over the last threeyears and 15% in the first half of 2010 to$25 trillion on the back of sharp assetprice movements, BIS says.Positions of foreign exchange derivativesincreased to $63 trillion, a rise of 9% overthe last three years. The growth in thissegment was much slower than the 83%growth from 2004–07. Gross market val-ues of FX derivative contracts increased97% to $3.15 trillion in June 2010 from$1.6 trillion three years earlier.Interest rate derivatives remains by far thelargest type of risk traded on the OTC de-

rivatives market in terms of both notionalamounts and gross market values. Openpositions in interest rate contracts totalled$478 trillion in mid-2010, 25% higherthan three years before and 0.4% over thefirst half of 2010. Gross market values ofinterest rate contracts went up by 175% to$19 trillion.Interest rate contracts now account for82% of the OTC derivatives market com-pared with 75% three years earlier andforeign exchange derivatives account for11%, unchanged from three years previ-ously.Single currency interest rate swaps re-mained the dominant instrument withinthe rates segment, accounting for morethan three quarters of total notionalamounts falling into this category. Op-tions made up 11% of the market, downfrom 15%. Forward rate agreements sawtheir share rise from 7% to 13% in June2010.Positions in credit derivatives declined39% from three years earlier to $31 tril-lion at end-June 2010. CDS continue to be by farthe dominant instrument in this category,accounting for 99% of credit derivatives.This compares to 88% in 2007. In contrastto the decline in amounts outstanding,market values of credit derivatives rose by88% to $1.7 trillion over the three-yearsurvey period to 2010.The BIS surveys come as regulators glob-ally are working on rules to steer as manyOTC derivatives as possible on to clearinghouses and to have them traded in publictrading venues to reduce risks to the fi-nancial system.

Derivatives Markets Contract 4% - BIS

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Following the publication of new capi-tal adequacy standards in July, theGroup of Governors and Heads of Su-pervision, the oversight body of theBasel Committee on Banking Supervi-sion, has ratified a substantial strength-ening of existing capital requirementsand fully endorsed the agreements.

“These capital reforms, together withthe introduction of a global liquiditystandard, deliver on the core of theglobal financial reform agenda and willbe presented to the Seoul G20 Leaderssummit in November,” the BIS says.The Committee's package of reformswill increase the minimum common eq-uity requirement from 2% to 4.5%. Inaddition, banks will be required to holda capital conservation buffer of 2.5% towithstand future periods of stress bring-ing the total common equity require-ments to 7%. This reinforces thestronger definition of capital agreed bygovernors and heads of supervision inJuly and the higher capital requirementsfor trading, derivative and securitisa-tion activities to be introduced at theend of 2011.The new rules are to be phased in toJanuary 2015, the Tier 1 capital re-quirement, which includes common eq-uity and other qualifying financialinstruments based on stricter criteria,will increase from 4% to 6% over thesame period.A countercyclical buffer within a rangeof 0% - 2.5% of common equity orother fully loss absorbing capital willbe implemented according to nationalcircumstance, the BIS say. The purposeof the countercyclical buffer is toachieve the broader macro-prudentialgoal of protecting the banking sectorfrom periods of excess aggregate creditgrowth. For any given country, thisbuffer will only be in effect when thereis excess credit growth that is resultingin a system wide build up of risk. Thecountercyclical buffer, when in effect,would be introduced as an extension ofthe conservation buffer range.

The new capital requirements are sup-plemented by a non-risk-based leverageratio that will serve as a backstop to therisk-based measures described above.In July, governors and heads of supervi-sion agreed to test a minimum Tier 1leverage ratio of 3% during the parallelrun period. Based on the results of theparallel run period, any final adjust-ments would be carried out in the firsthalf of 2017 with a view to migrating toa Pillar 1 treatment on 1 January 2018based on appropriate review and cali-bration.“Systemically important banks shouldhave loss absorbing capacity beyondthe standards announced today andwork continues on this issue in the Fi-nancial Stability Board and relevantBasel Committee work streams,” theBIS states. “The Basel Committee andthe FSB are developing a well inte-grated approach to systemically impor-tant financial institutions which couldinclude combinations of capital sur-charges, contingent capital and bail-indebt. In addition, work is continuing tostrengthen resolution regimes.”The BIS further adds that since theonset of the global financial crisis,banks have undertaken “substantial” ef-forts to raise their capital levels. “How-ever, preliminary results of theCommittee's comprehensive quantita-tive impact study show that as of theend of 2009, large banks will need, inthe aggregate, a significant amount ofadditional capital to meet these new re-quirements. Smaller banks, which areparticularly important for lending to theSME sector, for the most part alreadymeet these higher standards,” it adds.The Governors and Heads of Supervi-sion also agreed on transitionalarrangements for implementing the newstandards. National implementation by

member countries will begin on 1 Janu-ary 2013. Member countries must trans-late the rules into national laws andregulations before this date. As of 1January 2013, banks will be required tomeet the new minimum requirements inrelation to risk-weighted assets(RWAs). These are 3.5% common eq-uity/RWAs; 4.5% Tier 1 capital/RWAs,and 8.0% total capital/RWAs.Phase-in arrangements for the leverageratio were announced in the 26 July2010 release from the Group of Gover-nors and Heads of Supervision. That is,the supervisory monitoring period willcommence 1 January 2011; the parallelrun period will commence 1 January2013 and run until 1 January 2017; anddisclosure of the leverage ratio and itscomponents will start 1 January 2015.Based on the results of the parallel runperiod, any final adjustments will becarried out in the first half of 2017 witha view to migrating to a Pillar 1 treat-ment on 1 January 2018 based on ap-propriate review and calibration. After an observation period beginningin 2011, the liquidity coverage ratio(LCR) will be introduced on 1 January2015. The revised net stable fundingratio (NSFR) will move to a minimumstandard by 1 January 2018. The Com-mittee will put in place rigorous report-ing processes to monitor the ratiosduring the transition period and willcontinue to review the implications ofthese standards for financial markets,credit extension and economic growth,addressing unintended consequences asnecessary.Jean-Claude Trichet, president of theEuropean Central Bank and chairmanof the Group of Governors and Headsof Supervision, says that the agree-ments “are a fundamental strengtheningof global capital standards,” adding that"their contribution to long term finan-cial stability and growth will be sub-stantial. The transition arrangementswill enable banks to meet the new stan-dards while supporting the economicrecovery.”

Central Bankers Ratify Basel III Standards

“Systemically important banks should have loss absorbingcapacity beyond the standards announced”

“These capital reforms, together with the introduction of aglobal liquidity standard, deliver on the core of the globalfinancial reform agenda”



The New York-based Foreign ExchangeCommittee has released an updatedversion of its best-practice documentManagement of Operational Risk inForeign Exchange, which encouragesall significant players to use the settle-ment services provided by CLS Bank.At the same time the committee also re-leased a paper that provides anoverview of credit risk in foreign ex-change including a detailed discussionof the use of credit support annexes(CSAs) in the marketplaceNew language has been included in thedocument to reflect the FXC’s commit-ment to the importance of utilising pay-ment-versus-payment services such asContinuous Linked Settlement (CLS) tofurther mitigate settlement risk.The FXC says it strongly believes that in-creased use of CLS in concert with abroader use of credit risk mitigationstrategies such as credit support annexes(CSAs) benefits the global foreign ex-change market. “Together, these tools provide significantrisk mitigation while preserving the flexi-bility, accessibility, and efficiency of thishighly important and interconnected mar-ket,” says Jeff Feig, chair of the FXC. In a November 2009 paper, the ForeignExchange Committee observed that theavailability of CLS was a key contributorto the robust functioning of the foreignexchange market during the recent periodof financial market disruption.Accordingly, Best Practice number 34 inthe document has been amended as fol-lows:“Understand the settlement process andsettlement exposure and use settlementservices wherever possible to reduce set-tlement risk within the market. Marketparticipants should measure and monitorsettlement risk exposures. All senior man-agers should obtain a high-level under-standing of the settlement process as wellas of the tools that exist to better managesettlement risk. Additionally, both creditand risk managers (those managing posi-tion risk and credit risk) should be cog-nisant of the impact their internalprocedures have on settlement exposure.“Settlement risk may be reduced if thoseinvolved in the process better understandthe ramifications of its possible failure.Senior management, sales and trading,operations, risk management, and credit

management should understand theprocess and be aware of the timing of thefollowing key events in the process: whenpayment instructions are recorded, whenthey become irrevocable, and when con-firmation of counterparty payment is re-ceived with finality. Knowledge of theseitems allows the duration and amount ofFX settlement exposure to be better quan-tified.“Both credit and risk managers should de-velop accurate methods to quantify settle-ment risk. A bank’s actual exposure whensettling an FX trade equals the fullamount of the currency purchased, andlasts from the time a payment instructionfor the currency sold can no longer becancelled unilaterally until the currencypurchased is received with finality. “Market participants should adequatelyutilise settlement services that reducetheir exposures to settlement risk when-ever possible, for example, through theuse of payment-versus-payment services,such as those offered by CLS, for the set-tlement of eligible foreign exchangetransactions. Counterparties currently un-able to use such services should be en-couraged to consider ways to use them.”

Credit Risk

The second paper, Tools for MitigatingCredit Risk in Foreign Exchange Transac-tions, also introduces language on prudentmanagement of credit risk to the Commit-tee’s core best-practice documents,Guidelines for Foreign Exchange TradingActivities and Management of Opera-tional Risk in Foreign Exchange.The updated guidance in Guidelines forForeign Exchange Trading Activities en-courages financial institutions to managetheir credit risk exposure through the useof master netting agreements and collat-eral arrangements, such as credit supportannexes (CSAs).Netting agreements reduce the size ofcounterparty exposures by requiring thecounterparties to offset trades so that onlya net amount in each currency is settledand provide for a single net payment uponthe closeout of all transactions in theevent of a default or termination event.Collateral arrangements are those inwhich one or both parties to a transactionagree to post collateral, usually cash orliquid securities, for the purpose of secur-

ing credit exposures that may arise fromtheir financial transactions.Master netting agreements specify notonly the various events of default and ter-mination events applicable to the parties,including bankruptcy, failure to pay orperform under the transactions, and cross-default to indebtedness, in excess of spec-ified thresholds, but also provide themethodology for calculating the net close-out value payable to or by the non-de-faulting or non-affected party of thetransactions governed by these agree-ments.By reducing counterparty credit exposure,broad use of CSAs in connection withmaster netting agreements helps to furtherstrengthen the smooth functioning of, androbust liquidity offered by, the global for-eign exchange market, the FXC says.CSAs provide a framework within whichmarket participants can extend credit toparties that they may otherwise not havetransacted with, or in magnitudes that oth-erwise may not have been offered. Fur-ther, this collateral framework can help toreduce systemic risk given the ability toset off all or a portion of amounts owedbetween the parties by recourse to the col-lateral.The FXC says institutions may also re-duce their credit risk exposure through avariety of other means including: specialpurpose vehicles; mark-to-market cashsettlement techniques; closeout contracts,material change triggers; and multilateralsettlement systems, such as CLS.The FXC has also updated best practicenumber three in the Management of Oper-ational Risk in Foreign Exchange bestpractice document.It says that if a bank elects to use a masteragreement with a counterparty, the masteragreement should contain legally enforce-able provisions for “closeout” nettingand/or settlement netting.“Closeout” and settlement netting provi-sions in master agreements permit a bankto decrease credit exposures, increasebusiness with existing counterparties, anddecrease the need for credit support ofcounterparty obligations. Closeout netting clauses provide for 1)appropriate events of default, includingdefault upon insolvency or bankruptcy, 2)immediate closeout of all covered transac-tions, and 3) the calculation of a single net

FXC Updates Documentation




July • Israel • new boardThe president of ACI Israel is Mr. DrorSachsThe secretary is Mr liran CarmelThe treasurer is Sandrine Finkelstein

September • Jordan • new boardThe President: Mr Ali abu SwaiThe Vice President: Mr Ahmad S.ElaayanThe Secretary: Mr Nour J. AbdulQaderThe Treasurer: Mr. Mohammed Swais

September • Indonesia Panji Irawan PresidentWiwig Santoso Vice PresidentHelmi Imam Satriono Secretary Edy Masrianto Treasurer

October • NorwayTom Frederick Pehrsen President

October • SerbiaMr Filip Jelic President

October • Zambia Mwape Kambafwile President

November • KoreaJong-Soo, Ha PresidentGi-Back, Kim Secretary

NEWS FROM THE ASSOCIATIONS

obligation from unrealised gains andlosses. Closeout provisions have theadded benefit of a positive balance sheeteffect under Financial Accounting Stan-dards Board (FASB) Interpretation 39,which allows the netting of assets and lia-bilities in the unrealised gains and lossesaccount if netting is legally enforceable inthe relevant jurisdiction.Closeout netting provisions help to pro-tect a bank in the event of a counterpartydefault. When a counterparty defaults, anda closeout netting agreement is not inplace, the bankruptcy trustee of the de-faulting party may demand payment on allcontracts that are in-the-money and refuseto pay on those that are out-of-the-money.If the defaulting counterparty takes thisaction, the non-defaulting party may beleft with a larger-than-expected loss. Amaster agreement signed by both partieswith enforceable closeout netting provi-sions ensures that the counterparty re-mains responsible for all existingcontracts and not just those it chooses toendorse.Settlement netting permits parties to settlemultiple trades with a counterparty withonly one payment instead of settling eachtrade individually with separate payments.Consequently, settlement netting decreasesoperational risk to the bank in addition toreducing settlement risk. To realise the set-tlement netting benefits, however, a bank’soperations function must commence set-tling on a net basis. Therefore, it is essen-tial that operations receive a copy of theagreement or be notified of the terms ofthe executed agreement.Given the benefits of settlement netting, itis in a bank’s best interest to include set-tlement netting in any master agreement

that it may enter into, the FXC says.Master agreements that have been devel-oped as industry-standard forms includethe ISDA Master Agreement; IFEMAagreement covering spot and forward cur-rency transactions; ICOM agreement cov-ering currency options; and FEOMAagreement covering spot and forward cur-rency transactions and currency options.These netting provisions should satisfyrelevant accounting and regulatory stan-dards as long as legal opinions are able toconclude that the agreements are legallyenforceable in each jurisdiction in whichthey are applied. Banks should conferwith local legal counsel in all relevant ju-risdictions to ensure that netting provi-sions are enforceable. To the extent thatlocal counsel suggests that certain provi-sions of a master netting agreement maybe unenforceable, the bank should ensurethat other provisions in the agreementcould be enforced nonetheless. A credit support annex can also be negoti-ated as a supplement to these master net-ting agreements. CSAs provide for themovement of collateral between partiesduring the term of outstanding transac-tions governed by the master nettingagreement in order to reduce the net expo-sure that may result in the event of a trad-ing counterparty’s bankruptcy or otherdefault under such agreement. Under a CSA, one or both parties agree topost collateral to secure counterpartycredit exposure, typically on a net basis.Under these CSAs, failure to deliver re-quired collateral also constitutes an eventof default under the master netting agree-ment. There may be two components toany collateral arrangement. The primarycomponent is a requirement to deliver col-lateral based on the net mark-to-market

valuation of all transactions documentedunder the masteragreement, or “variation margin.” In the case of the ISDA CSA, variationmargin is determined based on mid-mar-ket values for the transactions and doesnot reflect the bid or offer spread thatwould result in replacing the transactionsin an actual default of one of the parties.Variation margin is calculated at mid-mar-ket in order to avoid one partybeing preferred over the other as a resultof calculating the mark-to-market value oftransactions at that party’s side of the mar-ket (which would include bid or offer, asapplicable).Variation margin is most commonly cal-culated based on the previous day’s clos-ing marks and is delivered on a daily basisto the party that has the net receivable inthe event of a closeout of the transactions.The other component to the collateral re-quirement is commonly referred to as“initial margin” or “IndependentAmount,” the term used in the ISDACSA. The purpose of this collateral re-quirement—which may be defined forspecific transactions, a portfolio of trans-actions, or all transactions governed bythe relevant master agreement, either inthe credit support document or in transac-tion confirmations—is to provide addi-tional cushion beyond the mark-to-marketexposure. In cases where a party’s tradingpartner is in default, the initial marginserves as a buffer to protect against mar-ket movements in transaction values dur-ing the time between the last variationmargin delivery and the date on which thenon-defaulting party can actually closeout positions and apply collateral or whena bid-offer spread is applied in order todetermine replacement value.

FXC Updates. Continued from p.11

RECENT CHANGE IN NATIONAL ASSOCIATIONS

Documents

ACI BRIEFING11 edit2:Layout 1 · Derivatives Markets Contract 4% BIS .....08 Central Bankers Ratify Basel III Standards....10 FXC Updates Documentation .....11 News from the Associations.....12