Best Practice Fx

A Guide to Achieving Best Practice in Foreign Exchange

Through Automation

Copyright 2004 FX Alliance, LLC. All rights reserved.

BEST PRACTICES USING FXALL | 2

Table of Contents

1. Introduction ................................................................................................... 3

1.1 Controlling Risk in Todays Environment................................................................................. 3

1.2 How Adoption of FXall Promotes Best Practice ....................................................................... 4

1.3 Summary of Key Operational & Compliance Benefits from using FXall.................................... 6

2. Introduction to FXall ...................................................................................... 7

3. Best Practices Review..................................................................................... 8

3.1 Pre-Trade Preparation and Documentation............................................................................. 8

3.2 Trade Capture ....................................................................................................................... 10

3.3 Confirmation & Netting......................................................................................................... 12

3.4 Settlement............................................................................................................................ 15

3.5 Accounting / Financial Control ............................................................................................. 17

3.6 General Practices.................................................................................................................. 19

4. FXalls Implementation of Best Practices ..................................................... 24

Appendix 1: How FXall Automates Customers Workflows............................... 26

A.1 How Does it Work? ............................................................................................................... 26

A.2 Front-Office .......................................................................................................................... 26

A.3 Middle & Back-Office ............................................................................................................ 27

A.4 Reducing Settlement Risk..................................................................................................... 27

Appendix 2: Complete Listing of Best Practices from the Foreign Exchange Committee........................................................................................................ 28

Appendix 3: List of Related Documents & Websites......................................... 30



1. Introduction

Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal procedures, people, and systems, or from external events.1 Foreign Exchange Committee, March 2003 Although thousands of dealers, in centres all over the world, are conducting their daily business in a highly professional way and under the highest ethical standards, the fraudulent actions of these individualshave cast a dark cloud over the entire industry. ACI. From a statement to the press, 24th November 2003 Focus: Is there an honest man on Wall Street? FBI agents arrested 48 New York currency traders last week in the lastest scandal to rock the financial world The Times, London, 23rd November 2003 John McCarthy, director of foreign exchange trading at ING Capital Markets in New York and a 24-year veteran of the industry, said, "In the long run, the foreign-exchange market crosses every border and, as a consequence, regulating it would be a monumental and probably impossible task. A further consequence of this might be to move transactions to electronic platforms where transparency is more fully recognized." Reuters, From Fraud Is Easy in Big, Lightly Regulated Forex Market, 19th November 2003 The pressure has never been greater on firms trading foreign exchange to ensure that they operate to the highest standards. Clients and banks must move to tighten their internal controls and procedures in order to ensure that they comply with local and international governance and professional market standards.

1.1 Controlling Risk in Todays Environment

Controlling operational risk means knowing exactly the who, what, when, where and how details regarding any individual transaction. Reducing operational risk is a result of planning and implementation of procedures, processes and systems to ensure that the proper controls are in place and can be constantly monitored. Firms that trade FX must maintain confidence in the market by implementing solutions that will provide the appropriate safeguards to control and manage risk while at the same time preserving a fair, transparent and efficient marketplace.2

1 The Foreign Exchange Committee, Management of Operational Risk in Foreign Exchange. (New York: March 2003), p.3 2 From a statement by the Foreign Exchange Committee (New York: 1st December 2003).



On 1st December 2003 the the Foreign Exchange Committee3 stated that the Committee will examine what measures can be taken [that] might include enhanced controls, contemporaneous time-stamping of trades and straight through processing. The Committee also recommended that all market participants assess their own operations with a view to strengthening internal controls and ethical standards where necessary4 Trading FX electronically on FXall provides risk control tools as built-in features. Users find access to competitive rates with a full suite of professional dealing tools while benefiting from efficiencies gained when trading in an automated environment. FXall provides an automated process for trade execution and matching and confirmation while carefully segmenting the front, middle & back office functions. In addition, FXall offers QuickConnect, an automated tool providing full connectivity, or STP, for execution and confirmation, as another means of minimising risk.

1.2 How Adoption of FXall Promotes Best Practice

The product suite provided by FXall can help firms implement Best Practices as put forward by the Foreign Exchange Committee. This document will broadly explore those Best Practices and set-out how FXall can assist with the implemenation of Best Practices by providing the quality management and audit tools to ensure that your employees are complying with your firms trading policies and mandates. There are other Best Practice or Code of Conduct manuals published by the Bank of England and the ACI (The Financial Markets Association) and where appropriate, reference will be made to the recommendations of these organisations as well.

3 The Foreign Exchange Committee is convened by the Federal Reserve Bank of New York and is composed of representatives from major financial institutions involved in the foreign exchange markets. The Foreign Exchange Committee and the Federal Reserve Bank of New York do not endorse any particular automated dealing system. 4 From a statement by the Foreign Exchange Committee (New York: 1st December 2003).



In the table below we list the specific Best Practices from the Foreign Exchange Committee where FXall has a clear role in helping firms implement Best Practices. A complete listing of Best Practices is available in Appendix 2.

Foreign Exchange Committee Best Practice No. Pre-Trade Preparation and Documentation FXC no. 4 Agree upon Trading and Operational Practices FXC no. 5 Agree upon and Document Special Arrangements

Trade Capture FXC no. 6 Enter Trades in a Timely Manner FXC no. 7 Use Straight Through Processing FXC no. 8 Use Real-Time Credit Monitoring FXC no. 9 Use Standing Settlement Instructions FXC no. 10 Operations Should Be Responsible for Settlement Instructions FXC no. 11 Review Amendments FXC no. 12 Closely Monitor Off-Market Transactions

Confirmation FXC no. 13 Confirm and Affirm Trades in a Timely Manner FXC no. 14 Be Diligent When Confirming by Non-secure Means FXC no. 17 Institute Controls for Trades Transacted through Electronic Trading

Platforms FXC no. 18 Verify Expected Settlement Instructions FXC no. 19 Confirm All Netted Transactions FXC no. 21 Confirm All Block Trades and Split Allocations FXC no. 23 Automate the Confirmation Matching Process FXC no. 24 Establish Exception Processing and Escalation Procedures

Netting FXC no. 25 Use On-Line Settlement Netting Systems FXC no. 26 Confirm Bilateral Net Amounts FXC no. 27 Employ Timely Cut-offs for Netting FXC no. 28 Establish Consistency between Operational Practices and

Documentation

Settlement FXC no. 31 Use Automated Cancellation and Amendment Facilities FXC no. 34 Understand the Settlement Process and Settlement Exposure

Accounting/Financial Control FXC no. 41 Conduct Daily Position and P&L Reconciliation FXC no. 42 Conduct Daily Position Valuation FXC no. 43 Review Trade Prices for Off-Market Rates FXC no. 44 Use Straight Through Processing of Rates and Prices

General Best Practices FXC no. 48 Ensure Segregation of Duties FXC no. 53 Control System Access FXC no. 55 Use Internal and External Operational Performance Measures FXC no. 56 Ensure That Service Outsourcing Conforms to Industry Standards

and Best Practices FXC no. 57 Implement Globally Consistent Processing Standards FXC no. 58 Maintain Records of Deal Execution and Confirmations FXC no. 59 Maintain Procedures for Retaining Transaction Records FXC no. 60 Develop and Test Contingency Plans



1.3 Summary of Key Operational & Compliance Benefits from using FXall

Action Online Trading Telephone

Request for Quotes Full audit trail of trade requests. Reports monitor quote performance of providers which helps demonstrate fulfillment of fiduciary responsibility to trade at best price.

Taped conversations only.

Log all Completed Trades Full audit trail of trade execution, username, date & time-stamped.

Manual entry by trader into deal capture system.

F R O NT

O F F I C E

Monitor Counterparty Credit Limits

Immediate, accurate update of trade details via STP QuickConnect facilitates real-time credit monitoring.

Delayed due to manual booking of transaction.

Trade Allocations STP QuickConnect interface reduces manual errors and provides full audit trail. Allocation details can be provided pre-trade to minimize risk of fraud. Post trade allocations are time stamped.

Manual entry by trader into deal capture system. Potentially unsecure methods of communicating allocations.

Post-trade amendments Full audit trail of trade amendment. Firms can restrict access to these post-trade functions by username.

Taped convesations only. Manual entry by trader into deal capture system.

M I D D L E

O F F I C E

Daily Mark-to-Market Use FXalls end-of-day rates for Daily P&L valuation from an unbiased source.

3rd Party independent provider required.

Trade Confirmations SWIFT based confirmation and settlement messaging with banks. Full audit trail and STP functionality available.

Taped conversations only. Paper-based trade records.

Prime Broker Give-ups Automated Give-ups between customer, executing bank and prime broker. Full audit trail and STP functionality available.

Taped conversations only. Paper-based trade records.

Standing Settlement Instructions Database

SSIs automatically applied to trades. Non-standard SIs have full audit trail.

Paper-based data records only. No automated tracking of non-standard SIs.

B A C K

O F F I C E

3rd Party Confirmations Fully automated via SWIFT with full audit trail.

Paper-based trade records. No audit trail.



2. Introduction to FXall

Since its inception, FX Alliance (FXall) has worked closely with leading corporate, financial institutions and asset management firms to develop functionality that encompasses their entire workflow. Simultaneously, FXall has expanded its network to include most of the major FX and custodian banks. FXall focuses on adding value throughout the entire dealing workflow with a full suite of products offering an end-to-end solution for all users. The FXall suite has three product lines that address trading and processing needs. Each product addresses a key aspect of the trading workflow:

Diagram 1: FXalls product suite

FXall Trading

QuickTrade - real-time competitive quotes from multiple counterparties simultaneously

QuickBatch trading for efficient execution of complicated trades with multiple allocations or legs

Choice of pre- or post-trade allocations

Settlement Center

SWIFT based confirmation and settlement messaging with banks

SWIFT based notifications to custodians

SSI Database simplifies settlement administration

CLS compatible for customers using third- party settlement

Full automation for prime brokerage give ups and reverse give ups

QuickConnect

Fully automated STP into front- and back-office systems

Trading API allows customers to incorporate execution directly into their Treasury and Order Management Systems

The FXall Trading and Settlement Center products can be used independently. For example, an asset manager can use FXall for execution, but continue to use its existing processes for confirmation and settlement preparation. Or the asset manager can adopt Settlement Center to streamline its middle and back-office, but continue to use a combination of execution methods telephone, FXall, etc. Role-based entitlements and a full audit trail for all FXall functions ensure that activities are properly controlled with maker/checker functionality. The audit trail record includes winning and losing quotes, changes in SSIs, and indicative prices. However, the best synergies, controls and operational efficiencies are achieved when the customer adopts both products. To learn about how FXall automates customers workflows, please see Appendix 1.



3. Best Practices Review

This section reviews in detail how FXall can ensure that FX market participants can meet the Best Practice guidelines as defined by the Foreign Exchange Committee.

3.1 Pre-Trade Preparation and Documentation

Best Practice no. 4: Agree Upon Trading and Operational Practices

From the FXC Guide Trading and operational practices should be established with all counterparties. The amount of trading activity with fund managers and investment advisors has escalated in recent years. These clients transact in block or bulk trades, which are then split into smaller amounts and entered into specific client accounts managed by fund managers or investment advisors. Until a block or bulk trade is properly allocated to the specific accounts of each fund entity, inaccurate credit risk management information may exist. A bank should strongly encourage clients to confirm bulk trades as soon as possible after the trade is executed. In addition, a bank should request that fund managers provide them with the split information on the trade date for all trade types so that the bank's credit information can be updated as soon as possible.

How FXall Solves this Issue

FXall has two types of automated block trading capabilities, pre-trade and post-trade allocations. Both are optimized to ensure implementation of Best Practice. With automated pre-trade allocations, the trader can complete all the executions by clicking a single button. From the counterparty banks perspective, this is a more efficient method of processing block trades and facilitates real-time credit checking before the deal is concluded.

Post-trade allocations are also available for trades executed over FXall or the telephone. For phone trades, counterparties can agree to the spot rate over the telephone, and then use Batch Trading to send the account breakdown for the deal. The provider adds forward points if required and, following review by the trader, the deal is booked electronically by both parties. This method combines the relationship advantages of the telephone with the straight through processing efficiencies of electronic execution.

With either approach to automated allocations, all activities include a full audit trail with each action stamped by time, date, and username.

Diagram 2: Batch Trading on FXall



Best Practice no. 5: Agree Upon and Document Special Arrangements

From the FXC Guide If, in the course of the documentation set-up and establishment of trade and operational practices, it becomes clear that a counterparty requires special arrangementssuch as third-party payments or prime brokerage servicethose arrangements should be agreed upon and documented in advance of trading. Prime brokerage arrangementsmay also involve special occasions for misunderstanding the respective rights and obligations of the various parties. Such arrangements should be evidenced by written agreements (prime broker and dealer, prime broker and customer, dealer and customer) that have been reviewed and approved by legal counsel.


FXall facilitates the systematizing of special arrangements between counterparties relating to third-party payments, prime brokerage or any other agreement. The customer can ensure that only administrative staff have access to these hard-coded functions to minimise risk. As an example, FXall has both front and back-office capabilities for prime brokerage arrangements: FXall Trading allows entitled users to choose the prime broker when conducting a trade via QuickTrade. FXalls Settlement Center electronically manages prime broker give-ups between the three parties in the relationship. The prime broker will be asked to actively Accept or Reject a deal done between a client and an executing bank. Participants in a prime brokerage relationship may choose to mandate the use of FXalls Settlement Center for communicating give-ups in their trading documentation. FXall can provide a completely automated real-time give-up process that is agreed to by all parties as part of the prime brokerage agreements.

Diagram 3: From the FXall Prime Broker Getting Started Guide




3.2 Trade Capture

Best Practice no. 7: Use Straight Through Processing

From the FXC Guide When Sales & Trading and Operations use separate systems, electronic feeds should automatically feed all deals, adjustments, and cancellations from one system to the other. Ideally, the transaction data should also be carried straight through for posting to the general ledger, updating credit information, generating money transfer instructions, and feeding nostro reconciliation systems. To ensure timely processing by Operations and eliminate potential errors that can occur if trades are reentered into the Operations systems, straight through processing should exist between Sales & Trading and Operations. Such a link should move deals, adjustments, and cancellations to the Operations system as soon as they are finalized by Sales & Trading. See also Best Practice no. 8: Use Real-time Credit Monitoring. STP facilitates real-time transfer of trade data to allow for counterparty credit limits to be monitored. And, see also Best Practice no. 17: Institute Controls for Trades Transacted through Electronic Trading Platforms.


To gain the greatest benefits from electronic trading you need to automate the flow of data between FXall and your own systems. This eliminates the time consuming and inaccurate task of manual data entry. To make this automation possible, FXall has developed QuickConnect, a comprehensive straight through processing solution. FXalls STP solution covers the full deal lifecycle, covering pre-trade, through dealing, to confirmation and settlement preparation. However, our solution is flexible, allowing you to choose which processes to automate. This allows you to concentrate your energy where your particular business will see the greatest return. Finally, we offer several different technologies for the integrations themselves, meaning that we can connect to almost any trading system, from spreadsheets, through to proprietary and vendor supplied systems.

Diagram 4: System Integration using FXall QuickConnect


Best Practice no. 9: Use Standing Settlement Instructions

From the FXC Guide Standing Settlement Instructions (SSIs) should be in place for all counterparties. Market participants should issue new SSIs, as well as any changes to SSIs, to each of their trading partners in a secure manner. For banks, the preferable method is through an authenticated medium such as SWIFT messages. SSIs allow for complete trade details to be entered quickly, so that the confirmation process can begin as soon after trade execution as possible. In general, when SSIs are in place, it is possible to take full advantage of straight through processing because Operations may not have to manually intervene in the transaction during the settlement process. SSIs also allow for payments to be formatted properly and for readable SWIFT codes to be issued. If SSIs are not established, Operations must contact the counterparty to obtain settlement instructions and the deal record must subsequently be changed to reflect these settlement instructions. The extra work involved in inputting, formatting, and confirming settlement instructions increases the opportunity for errors in settlement, making SSIs important for risk management and efficiency. See also Best Practice no. 10: Operations Should be Responsible

no. 11 Review Amendments and Best Practice no. 18 Verify Expected Settlement for Settlement Instructions, Best Practice

Instructions.

The use, where possible, of Standardised Settlement Instructions (SShelps to eliminate costly mistakes. Finstruction management for Operations staff. Features include:

Support of SSIs and ad-hoc instructions Standard instructions can be automatically added Confirm without settlement instructions and add them late Creation of new settlement instructions is subject to supervisor

approval

Role-based entitlements and a full audit trail ensure that instructions arproperly controlled with maker/checker functionality. The audit trail records all changes, approvals and applications of the If your firm is already a user of FXall Trading, then you will already have apart of implementing Best Practices, FXall recommends that you designate a separate individual as the Settlement Center EntitlemManager so as to keep the front and back-office functions separate.

Diagram 5: SSIs on FXall

The Model Code ACI the Financial Markets Association

Is),


Xall has developed a full SSI database that provides secure

r

e

instructions.

person assigned as your internal Entitlements Manager. However, as

ents



3.3 Confirmation

& Netting

Best Practice no. 13: Co rnfi m and Affirm Trades in a Timely Manner

From the FXC Guide Bot apositiv trades, within two hours after execution and in no event later than the end of the day. This guideline applies to

ompliance staff.

to

These procedures are meant as practices for executions directly between two parties. In the case of prime brokerage relationships, (in which one financial institution extends its credit to a third-party dealing with the institutions customer), confirmations should be exchanged among the three parties in addition to the fulfillment of other requirements for exchanging information (see p. 9 for a review of FXalls Prime Brokerage capabilities). Also see Best Practice No. 21, Confirm All Block Trades and Split Allocations, No. 23, Automate the Confirmation Matching Process, No. 24, Establish Exception Processing and Escalation Procedures and Best Practice No. 34 Understand the Settlement Process and Settlement Exposure.

h p rties should make every effort to send confirmations, or ely affirm

trades executed with both external and internal counterparties. Any exception to this rule should be clearly documented and approved by Operations management and c Prompt confirmations are key to the orderly functioning of the market-place because they minimize market risk and minimize losses duesettlement errors.

TPhe Non-Investment roducts code Bank f England

In all markets, the confirmation provides a necessary final safeguard against dealing errors. The issue and checking of confirmations is a back-office responsibility which should be carried out independently from those who initiate deals. A confirmation of each deal should be sent out without delay and where

nically.

the prompt dispatch and checking of confirmations is of great importance. Non-standard settlement instructions should be particularly

omptly upon receipt, and notified direct to the counterparty

o

possible electro

carefully checked, and any discrepancies identified pr

The issue and checking of confirmations is a back office responsibility, which should be carried out independently of those who initiate deals. Confirmations should be sent out as quickly as possiblethrough and efficient and secure means FeXalls Settlement

facilitates the hard-coding of details relating to the settlement process including SSIs and third-party payments. Edata cannot be made without supervisor approval. Settlement Center provides back-office processing used by customers t

1. Automatically confirm trades with their providers (both on and oplatform)

2. Send settlement instructions 3. Notify4. Agree netted settlements.



Center is a back-office solution for lectronically managing the deal confirmation lifecycle. FXall

very action has a full audit trail and changes to the hard-coded

o: ff

custodians and other third parties, and




Settlement Center sits centrally in the matching and settlement process, using SWIFT industry standard communication to keep all parties fully in the picture.5 Depending on your firms capabilities and deal volumes, your firm has a variety of choices as to the level of automation you can

er s so as to

liminate the scope for errors.

ve to automated matching, customers can hoose to review and affirm confirmation messages sent in by their

eive

essage types

and also has a umber of reports available for monitoring each point of the settlement

nresolved at ny given moment in time.

implement. Typically the higher the deal volumes (numbers of tickets), the greatthe need is to automate the confirmation and settlement procese However, as an alternaticProviders via SWIFT. FXall currently sends and receives the following SWIFT message types on behalf of clients using Settlement Center: MT300 Foreign Exchange Confirmation MT304 Advice/Instruction of a 3rd Party deal MT202 General Financial Institution funds transfer MT210 Notice to Rec MT320 (Money Market) and MT305 (Plain Vanilla Options) mwill be added in early 2004. Settlement Center helps firms formalise their processes nprocess. These reports are particularly valuable when managing settlement risk and understanding which trades may be ua

6: the FXall Settlement Center Getting Starte

Diagram From d Guide

5 FX Alliance is a member of the SWIFT network and operates its own BIC code.


Best Practice no. 19: Confirm all Netted Transactions

All transactions, even those that will be netted, should be confirmed individually. N

From the FXC Guide

etting trades for settlement is an important operational function because it allows a bank to reduce settlement risk and operational cost. However, it is still necessary to confirm all transactions individually. If netted trades are not confirmed individually, trades may be mistakenly added or removed from the net agreement, which will be difficult to detect on settlement day. Incorrect netting will distort credit and settlement risk. The confirmation of these deals should be performed as it would be in any other transaction or with the aid of a netting service provider. See also Best Practice No. 25 Use On-Line Settlement Netting Systems and No. 26 Confirm Bilateral Net Amounts.

The Model Code ACI the Financial Markets ssociation

The Model Code recommends the use of netting systems to reduce settlement and credit risk. A

How FXall Solves this sue

FXalls Settlement Center allows counterparties to combine multiple payments arising from different deals into a single, equivalent payment. It calculates bilateral netted amounts and records agreement with provider for the netted amounts. Only deals that have been individually matched can be included in Netting totals. Once net confirmations have been created, they are then submitted to the counterparty bank for approval.

nts may however, choose particular accounts, banks, or currency combinations to net on an ad-hoc basis. See also Best Practice No. 27 Employ Timely Cut-offs for Netting and Best Practice No. 28 Establish Consistency Between Operational Practices and Documentation. Using a system for netting is the best way to ensure that your processes are in line with your documented procedures. Automation of calculated netted totals

s of netted amounts facilitates

Is

The default action is for all deals to be netted at once. Clie

and agreement between counterpartietimely completion of the netting process.

: From the FXall Settlement Center Getting Started Guide

Diagram 7



3.4 Settlement

Best Practice no. 31: Facilities Use Automated Cancellation and Amendment

Amechanism . to process the cancellation and amendment ofpayment instructions. Ainstructions after they have been released to nostro banks. Problems may arise if this information is not processed in a timely manneAmendments occur when an error in the original instruction has beeidentified or a counterparty has made a last minute change. Because execution of the erroneous payment instruction will certainly create animproper settlement, the bank needs to be sure the amendment is acupon so that its nostro balance predictionsim

From the FXC Guide bank [or customer] should establish a real-time communication

bank [or customer] may need to change or cancel payment

r. n

ted

are accurate. More portantly, a bank may wish to cancel a payment instruction if it is

reasonably confident that a counterparty may not fulfill its obligation to pay the counter-currency. An automated feed from the Operations system will make communication of amendments and cancellations easier. Such a link also decreases the chance that a bank will miss the payment deadline and should prevent incorrect payments from being released. See also Best Practice No. 14 Be Diligent When Confirming by Nonsecure Means. Authenticated electronic messaging is the most secure means of transmitting confirmations. See also Best Practice No. 12 Closely Monitor Off-Market Transactions


With FXall, post-trade amendments are processed in the most secure environment every action is time, date and username stamped with only authorised users having access to this functionality. And the full audit trail can be monitored by compliance staff in real-time.

different types of post-trade amendments to deals executed on FXalls trading platform: 1. Post Trade Allocations The customer can split a trade across

multiple accounts.

. Rebook at Average Rate The customer executes a number of lled and

or Cancellations: As discussed in a revious section, FXall Settlement Center provides the greatest

ough to

r.

Customers and liquidity providers can negotiate five

2. Value Date to Follow The customer can split the trade across multiple value dates.

3

transactions with the same provider. These are then cancerebooked as a single deal (at the provider-calculated weighted average execution rate).

4. Cancel and Rebook The customer submits a general amendmentrequest to the provider; if agreed, the counterparties potentially negotiate a new price. The original deal is then cancelled and replaced by the amended deal.

Back-office Amendmentspbenefit when full STP is achieved from trade initiation thrsettlement. However, dealers (people) do make mistakes and upon occasion deals need to be amended or cancelled altogethe


Copyright 2


If the trade has been done off-platform but Settlement Center is being in

ually or via SWIFT essaging are captured with a full audit trail and if required, maker /

used for confirmations, then counterparties can amend and cancel withthe back-office environment. All amendments and cancellations whether done manmchecker functionality is available.

Diagra

m 8: Audit Trail detail on Settlement Center

004 FX Alliance, LLC. All rights reserved.


3.5 Accounting / Financial Control

Best Practice no. 41: Conduct Daily Position and P&L Reconciliation

From the FXC Guide Daily P&L and position reconciliations should take place between the Sales & Trading and Operations systems. Banks that maintain a single system for trade capture data should ensure that the data source is properly controlled. See also Best Practice No. 42, Conduct Daily Position Valuation. Position valuation should be checked against independent price sources (such as brokers or other banks). See also Best Practice No. 43 Review Trade Prices for Off-Market Rates. Trade prices should be independently reviewed to ensure reasonableness within the market prices that existed on the trade date. See also Best Practice No. 44, Use Straight Through Processing of Rates and Prices. Rates and prices should be fed electronically from source systems. To eliminate the errors associated with collecting and rekeying the required rates and prices, a bank [or customer firm] should establish electronic links from the systems that source the rates and price information to the position valuation systems.

The Non-Investment Products code Bank of England

Principals who engage in trading should undertake regular prudent and consistent valuation of their mark-to-market trading positions. For many such positions, quoted prices will be the best guide to a fair valuation. Screen services, brokers and other third-party providers can all be useful sources of data.


Ensure timely and accurate risk measurement. Trading positions should be marked to market on a daily basis by a function independent of trading. Valuations should be verified against independent sources wherever possible.


Use FXalls end-of-day rates for daily P&L valuation from an unbiased source. The FXall Hourly Rates are derived from the FXall Indicative Quotes feed. FXall's fully integrated liquidity providers deliver streaming quotes directly from their rate engines to the FXall platform. FXall uses a proprietary algorithm to blend the contributions into a


that are currently available through the FXall Indicative Quotes Panel. In addition, subscribers will have access to a full search and download facility for retrieving historical rates.

single, real-time quote stream. The algorithm identifies and eliminates out-of-range data to ensure that the FXall real-time quote stream is accurate and reliable. FXalls rates are market neutral; meaning they are not biased towards the commercial interest of any single provider bank. The FXall Hourly Rates provide a useful tool to members of FXall's global trading community who perform daily mark-to-market processes throughout the trading day. FXall posts Hourly Rates for all of the major market closings to ensure that all customers can benefit from this service regardless of their location. Subscribers to FXall's Premium Information Services package can access a comprehensive list of Hourly Rates for all currency pairs and tenors



Premium Information Services subscribers can also use FXall's QuickConnect integration services to automatically download the FXall

their portfolio management systems for use in marking to market and P&L valuations. In addition to using FXall rates for valuations, each FXall trade ticket

es facility with the trade P&L calculated against that market rate. This allows firms to

Hourly Rates directly into

includes the current market FX rate from the blended quot

monitor their providers for rate reasonableness.

9: FXall Hourly Rates Screen

Diagram


3.6 General Practices

The reporting line for Operations personnel should be independent of the reporting line for other business lines (Sales & Trading, credit, accounting, audit, and so onO

Best Practice no. 48: Ensure Segregation of Duties

From the FXC Guide

). For key areas, perations management should ensure that an appropriate

segregation of duties exists within Operations and between Operations and other business lines. Examples of good practices include:

Precluding individuals from having both trading and confirmation / settlement responsibilities concurrently Precluding Sales & Trading personnel from issuing and authorizing payments Not allowing established procedures to be overridden without Operations management's consent Separate database functions between Sales & Trading and Operations

How FXall Solves this

sue

FXall has been designed to ensure a complete segregation between front, middle and back-office duties. FXall recommends that you have two entitlements managers designated one for managing front and middle-office trading / support functions and one for back-office settlement and confirmation functions. The process of setting up users is controlled by the customer. The FXall administrator will set up a customer entitlements manager, who is a customer employee responsible for setting up additional users with appropriate entitlements in the application. The front-office customer

titles specific sub-accounts to trade with specific banks. The trading application incorporates these account-level entitlements in the aggregation, netting and RFQ functions. The Settlement Center entitlements manager will be in charge of all the administrative set-up functions relating to the use of Settlement Center. Responsibilities include assigning roles to SC users (e.g., maker, checker) and creating / maintaining mapping between accounts and bank branches (Settlement Entity mapping).

Is

entitlements manager also en

Diagram 10: Full Maker / Checker capabilities built in for compliance



Best Practice no. 53: Control System Access

From the FXC Guide Users of a system (for example, Operations, Sales & Trading) should not be able to alter the functionality of production

limited access to production Each

n-

llowed for those dividuals who require access in order to perform their job function.

ystem administrators should tailor thinc nd entitlements should be psystem should have their access revoked. Under no circumstance should O ion sys

systems. Developers should havesystems, and only in a strictly controlled environment. system should have access controls that allow only authorized individuals to alter the system and/or gain user access. Functiospecific user access "profiles" are suggested. Access to production systems should only be ainWhen creating user access profiles, s

e profile to match the user's specific job requirements, which may lude "view only" access. System access a

eriodically reviewed, and users who no longer require access to a

perations or Sales & Trading have the ability to modify a producttem for which they are not authorized.

the Financial Markets Associ

Spsystems equipment and confidential information.


tities.

t logs into Xall, they are forced to change their password.

r must

onfidentiality and Encryption: The Secure Socket Layer (SSL) protocol is used to encrypt network communication for all sensitive traffic. 128-bit encryption key lengths are the standard key length for critical applications, including login, trading and reporting. VeriSign global site certificates are used for all of these applications, which allow all supported browsers to use 128-bit encryption, regardless of whether they support 128-bit encryption natively. Security Audit: SAS 70 FXall has received from its independent auditors an American Institute of Certified Public Accountant's (AICPA) Statement on Auditing Standards No. 70 (SAS 70) report. The internationally-recognized SAS 70 report examines, through an independent third-party assessment process, the adequacy of controls surrounding the FXall Trading environment. The SAS 70 is the industry standard for security competency for financial e-commerce websites. Security Monitoring:

rther protect trading. Intrusion detection tools provide real-time and historical

Is

Application Security: Each FXall user has a single FXall user ID and password. FXall also uses IP address filtering to ensure message traffic occurs between known en The process of setting up users is controlled by the customer org-anisation (see Best Practice no 48 above, Ensure Segregation ofDuties). During the onboarding process, each user sets up an authentication phrase (e.g., mother's maiden name) that is used to authenticate the user with the FXall customer service desk. When a user firsF Five consecutive invalid password authentication attempts in 24 hours results in a user account being locked out. The FXall administratoreset accounts that have been locked out. C

The Model Code ACI

ation

ecific and stringent access controls should also cover treasury IT

FXall deploys a variety of monitoring tools and actions to fu



monitoring to foil any known attack. Ongoing security auditing and assessment tools ensure FXall systems remain properly configured to identify and correct evolving marketplace vulnerabilities.

ns. FXall engages independent security consultants to perform extensive ethical hacking tests of the FXall network, systems and applicatio

U

Operational performance reports should be established to cleameasure and report on the quality of both internal and external (outsourced) operational performance. The report measuremeshould focus on operational efficiency and controls, and be reviewed on a regular basis by both Operations and Sales & Trading management. Operational performance reporting should cpthe status of operational activities. These reports should serve to coand proactively monitor risk and performance.

See also Best Practice no. 56: Ensure That Service Outsourcing Conforms to Industry Standards and Best Practices.


r (RMA) report hich allows firms to monitor their FXall statistics. The RMA

riod A breakdown by requests (RFQs) sent, answered and dealt in

w

o make a quote

Is

FXall provides a Relationship Management Advisowprovides:

A summary of a firms volume done on FXAll over any time pe

total How much business the bank has the opportunity to win and ho

much it is actually given The average time it takes for each bank t

Provider banks and client firms can use the RMA to monitor activity andensure that quality performance is reached.

1: Example of the Relation

Best Practice no.55: se Internal & External Operational Performance Measures

From the FXC Guide rly

nts

ontain quantifiable erformance metrics at the levels of detail and summary, and indicate

ntrol

Diagram 1 ship Management Advisor Report



Best Practice no. 58: Maintain Records of Deal Execution and Confirmations

Banks [and counterparties] should maintain documesmentation should provide a sufficient audit trail of the events throughout the deal execution, trade, and validation process. This d

From the FXC Guide ntation upporting the execution of foreign exchange trades. Such docu-

ocumentation may be in the form of written or electronic communication, a tape recording, or other forms evidencing the agreement between the parties. The length of time that a bank keeps records (which may be left to

and may also be subject to local regulations.

ants should establish close controls to

management's discretion) depends on the type of business they transact

It is important to note that trades conducted over the telephone pose particular risks. The phone conversation is the only bilateral record of the trade details, at least until the trade is validated through the

rocess. Until this confirmation process is traditional confirmation pompleted, market participc

minimize the exposure inherent in such trades. See also Best Practice No. 59 Maintain Procedures for RetainingTransaction Records.

Trade Confirmations: Every deal is logged instantly, as completed. Once the trade is executed on FXall, the customer and the liquidity provider confirm and settle the trades in accordance with current practices either via FXalls Settlement Center or off-platform. Using Settlement Center, customers can implement a fully automated confirmation procedure that not onrecords an

ail of every action taken by individual users.

ecords: tem istly, trade history for FXall trade recaps and Settlement

years in some jurisdictions. Reports: The FXall Reporting module offers clients and


ly d saves a record of the confirmation, but also includes the full

audit tr Trade RThe sys designed to retain records of a large volume of trades. CurrenCenter confirmations conform to best industry practice; up to seven

providers key reports to support and enhance their internal processes. Customers have the ability to access reports from the FXall Portal independently from the

port e in html, pdf and

scheduler with nclude

y reports, with

Trading applet to provide greater flexibility on queries and to supcompliance management controls. Reports are availablcsv formats and the frequency can be real time or vianotifications upon completion. The type of customer reports iDaily Activity, Audit Trail and Liquidity Provider Summarperformance benchmark reporting planned for the future.

Diagram 12: Reports on FXall



Best Practice no. 60: Develop and Test Contingency Plans

From the FXC Guide Operations and Sales & Trading should develop plans for operating in the event of an emergency. Contingency plans should be periodically reviewed, updated, and tested. These contingency plans should cover both long-term and short-term incapacitation of a trading or Operations site, the failure of system, the failure of a communication link between systems, or the failure of an internal/externa

a

l dependency. These plans hould include informing, monitoring, and coordinating

tial staff and systems of perations and Sales & Trading should be set up, maintained, and tested

ld e

e.

ng try utilities.

spersonnel. Backup sites that can accommodate the essenOon a regular basis. Particularly for Operations, market participants shouconsider developing a backup site that relies on a separate infrastructur(electricity, telecommunications, etc.) and an alternative workforc Backup sites should be able to access critical confirmation and nettisystems, key liquidity providers, and other indus See also Best Practice No. 57 Implement Globally Consistent Processing Standards.


Customers have the full benefit of FXalls substantial Continuity aff

ter capability. Xall has a full secondary technology infrastructure to ensure there is no

ure. In the event of a disaster that eliminates or

om

lans are tested and updated at least annually to mitigate the

).

he application was approved.

of Business (COB) investment: in the event of having to deploy stto your own back-up operations center, access to FXall for critical FX trading and settlement functions can still be maintained via a secure internet connection so that normal processing can still take place. FXall has established a business continuity plan with procedures to address intra-day outages as well as loss of data cenFsingle point of failsignificantly degrades processing capability at the primary site in New Jersey, USA, FXall can move primary processing to Virginia. FXall has24-hour customer support when markets are open and can function frany of its global locations. Recovery peffects of an outage to any portion of FXall operations. These outages can be a result of natural causes (weather, fire etc.) or infrastructureissues at the FXall location (flooding, power outage, system failure etcFXall will aim to contact its clients and providers about any outages in a timely manner, informing them of any system interruptions and alternative contacts and procedures to be used. The UK SFA (the predecessor to the FSA) reviewed FXalls Business Continuity Plan as part of FXalls registration application. T



4. FXalls Implem

FXall has implemented to ensure that the busi FXall is an independent am. Regulatory review FXall has been reviewetheir authorization to cother European Union c FXall has also been appunder the Banking Ordi st

FXall complies with applicable legal and regulatory requirements in each jurisdiction in which we operate. In m registration are availab itutional customers. We continue to

tions from whichttp://www.fxall.com/a

entation of Best Practices

its own corporate governance policies and guidelines for its staffness meets or exceeds all regulations and Best Practices.

company with its own board of directors and management te

d by the UK Securities and Futures Authority and has received onduct business in the UK. This authority has been passported to ountries under the EUs Investment Services Directive.

roved by the Hong Kong Monetary Authority as a money broker nance with effect from 31 August, 2001.

ost jurisdictions, including the United States, exemptions fromle for FX activity with inst

review the regulatory rjurisdic

equirements in additional jurisdictions; the current list of customers may trade is available on our website at bout/locations.htmlh .

Risk management athe CFO is responsible sponsible for the appecurity Committee conounsel, the CFO and t

he FXall Information Sformation security str ssment, the development of policy, rograms, mechanisms metrics, monitoring, and change management. FXall

Information Security is assets, including FXall ipolicy to review and tesinfrastructure and appl FXall does not take any market transactions. FXall does not maintain ny trading accounts for itself or for customers. FXall employees may not trade FX for th Support The trading capabilities are supported by comprehensive reporting and multi-lingual customer support centers that are staffed 24-hours when markets are open with IT and FX professionals. Strongest Industry Backing FXall enjoys the broadest and deepest industry backing of any FX portal:

FXall was founded by fourteen major international banks (and now has 17 equity partners) whose substantial equity funding and contributions of liquidity, marketing support and technical resources represent significant long-term commitment to FXalls success.

FXall for overall risk management. The FXall Security Committee is T

re roval of the Information Security Policy and Programs. The FXall sists of the CTO, the Information Security Officer, General

he COO.

ecurity Officer, under the direction of the CFO, supports ategic planning, risk asse

SC Tinp ,

additionally responsible for the physical protection of all FXall nformation, employees, facilities, and equipment. It is FXalls t its security policies and procedures and the security of its

ications periodically, and at least once per year.

market risk. FXall is not counterparty to any aeir personal accounts.



FXalls comprehensive functionality and proven technology have attracted more than 46 (and growing) liquidity providers, the vast maintegrated to the platform.

jority of whom are fully

FXall has been recognized many times by FX market participants and its peers by having

ation, ee http://www.fxall.com/about/awards.html

won numerous awards including the Euromoney 2003 award for Best Multibank Portal and #1 Multibank Portal from Global Investor 2003 FX Survey. For more inform

. s



Appendix 1: How FXall Automates Customers Workflows

A.1 How Does it Work?

The diagram below shows how these products and processes combine to deliver a orkflow that eliminates manual keying and largely automates processing.

Diagram 13: The FXall Workflow

A.2 Front-Office

Through QuickConnect integration, trade requirements are automatically uploaded from the clients Treasury or Order Management System to FXall.

Depending on the clients operating procedures, trade requirements can be uploaded as locked orders, ready for execution and flagged with a list of credit-checked banks. Alternatively these decisions can be left to the trading team.

The trader can choose between different styles of execution to seek the desired balance of execution speed and price efficiency:

1. Use the competitive trading system to send a Request for Quote (RFQ) to multiple providers simultaneously. The trader reviews the prices returned and chooses the winning broker.

2. To quickly execute a large number of deals, use the Batch Trading system to send several orders simultaneously to a single broker. The trader can complete all the executions by clicking a single button.

3. Agree the spot rate for the deal over the telephone, and then use the Send Details function in Batch Trading to send the account breakdown for the deal. The broker prices any forward points required and, following review by the trader, the deal is booked electronically by both parties. This method combines the relationship advantages of the telephone with the straight through processing efficiencies of electronic execution.

w


http://www.fxall.com/about/awards.html


Traders can mix and match these methods as desired, selecting the best approach for each individual deal.

And via the same QuickConnect integration, completed trade details can be automatically returned back to the client and banks systems to allow for real-time

rader limit supervision.

Trade detai bank. Usually, t Treasury

fed directly in

The winni to FXall over th by filtering the data des of the deal have b

Following c the deal the phys cludes an SSI Databa ement instruction

Using the try standard contains f

.4 Reducing Settlement Risk

ws the customer to choose between gross settlement, bilateral netting and CLS by supporting the transition from legacy settlement methods.

arty all customers, not just

asset managers. FXall supports the CLS

adds settlement instructions to the es.

instructions as well as the economic details.

Finally, ing module in Settlement Center allow a single, settlem

Diagram 14: FXall

booking, credit monitoring and t

A.3 Middle & Back-Office

ls are then sent to Settlement Center to await confirmation from the his is performed using a QuickConnect integration from the clients

or Order Management System. Alternatively, trades executed on FXall can be to Settlement Center with no integration required.

ng bank confirms the deal information by sending an MT300 message e SWIFT network. FXall interprets the banks particular SWIFT format and matches the details against the customers deal. Once the two si

een matched, the deal is confirmed.

onfirmation, the next step is to identify settlement instructions for ical bank accounts in which the FX will be settled. Settlement Center in

se to streamline this process. And banks maintain their own settls in the database, freeing customers of this responsibility.

information in the database, Settlement Center can also send an indusMT304 message over SWIFT network on behalf of an asset manager. This ull details of the economic and settlement details of the trade.

A

Settlement Center allo

For CLS participants, FXall provides seamless messaging by sending third-pnotifications for

Custody Mapping (the C- trigger) and

confirmation and notification messagMatching is available on the settlement

Reducing Settlement Risk

for clients that perform net settlement, the netts counterparties to combine multiple payments arising from different deals into

equivalent payment. The benefits of netting include the simplification of the ent process and the reduction of settlement costs and risk exposure.




mplete Listing of Best Practices from the

This document has only detailed some of the 60 Best Practices for managing Operational isk in Foreign Exchange. As a reference, please find below the complete listing.

Xall into its workflow will benefit significantly with hted in bold below:

ment Instructions

Best Practice no. 13: Confirm and Affirm Trades in a Timely Manner Best Practice no. 14: Be Diligent When Confirming by non-secure Means Best Practice no. 15: Be Diligent When Confirming Structured or Non-standard Trades

Confirming by Telephone Best Practice no. 17: Institute Controls for Trades Transacted through Electronic

Best Practice no. 19: Confirm All Netted Transactions Best Practice no. 20: Confirm All Internal Transactions

Tvifin

mNt-n

Settlement

Best Practice no. 33: Report Payment Failures to Credit Officers Best Practice no. 34: Understand the Settlement Process and Settlement Exposure Best Practice no. 35: Prepare for Crisis Situations Outside Your Organization

Appendix 2: CoForeign Exchange Committee

R

In summary, a firm implementing Fregard to the best practices highlig

Pre-Trade Preparation and Documentation Best Practice no. 1: Know Your Customer Best Practice no. 2: Determine Documentation Requirements Best Practice no. 3: Use Master Netting Agreements Best Practice no. 4: Agree upon Trading and Operational Practices Best Practice no. 5: Agree upon and Document Special Arrangements Trade Capture Best Practice no. 6: Enter Trades in a Timely Manner Best Practice no. 7: Use Straight Through Processing Best Practice no. 8: Use Real-Time Credit Monitoring Best Practice no. 9: Use Standing Settlement Instructions Best Practice no. 10: Operations Should Be Responsible for SettleBest Practice no. 11: Review Amendments Best Practice no. 12: Closely Monitor Off-Market Transactions Confirmation

Best Practice no. 16: Be Diligent When

Trading Platforms Best Practice no. 18: Verify Expected Settlement Instructions

rades and Split Allocations ce rmation Matching Process Processing and Escalation

ent Netting Systems et Amounts offs for Netting cy between Operational Practices and

Best Practice no. 21: Confirm All Block Best Practice no. 22: Review Third-Party AdBest Practice no. 23: Automate the ConBest Practice no. 24: Establish ExceptioProcedures Netting Best Practice no. 25: Use On-Line SettleBest Practice no. 26: Confirm Bilateral Best Practice no. 27: Employ Timely CuBest Practice no. 28: Establish ConsisteDocumentation

Best Practice no. 29: Use Real-Time nostro Balance Projections Best Practice no. 30: Use Electronic Messages for Expected Receipts Best Practice no. 31: Use Automated Cancellation and Amendment Facilities Best Practice no. 32: Implement Timely Payment Cut-offs


Nostro Reconciliation Best Practice no. 36: Perform Timely nosBest Practice no. 37: Automate nostro Re

tro Account Reconciliation conciliations

Best Practice no. 38: Identify non-receipt of Payments

Accounting/Financial Control

&L Reconciliation Best Practice no. 42: Conduct Daily Position Valuation Best Practice no. 43: Review Trade Prices for Off-Market Rates

rocessing of Rates and Prices

eliverable Forwards edures for the Exercise of Options

ions

actices

and Operational Roles

ducts, New Customer Types

Groups o. 55: Use Internal and External Operational Performance Measures

ndustry

sing Standards

: Maintain Procedures for Retaining Transaction Records

Best Practice no. 39: Establish Operational Standards for nostro Account Users

Best Practice no. 40: Conduct Daily General Ledger Reconciliation Best Practice no. 41: Conduct Daily Position and P

Best Practice no. 44: Use Straight Through P Unique Features of Foreign Exchange Options and non-DBest Practice no. 45: Establish Clear Policies and ProcBest Practice no. 46: Obtain Appropriate Fixings for non-standard TransactBest Practice no. 47: Closely Monitor Option Settlements General Best PrBest Practice no. 48: Ensure Segregation of Duties Best Practice no. 49: Ensure That Staff Understand BusinessBest Practice no. 50: Understand Operational Risks Best Practice no. 51: Identify Procedures for Introducing New Proor New Trading Strategies

ff and Implementation Best Practice no. 52: Ensure Proper Model SignoBest Practice no. 53: Control System Access est Practice no. 54: Establish Strong Independent Audit/Risk ControlB

Best Practice nBest Practice no. 56: Ensure That Service Outsourcing Conforms to I Standards and Best Practices Best Practice no. 57: Implement Globally Consistent ProcesBest Practice no. 58: Maintain Records of Deal Execution and Confirmations Best Practice no. 59Best Practice no. 60: Develop and Test Contingency Plans



Appendix 3: List of Related Documents & Websites

References

ForeiMana http:/

gn Exchange Committee gement of Operational Risk in Foreign Exchange March 2003

/www.newyorkfed.org/fxc/2003/fxc033103.pdf ACI The Financial Markets Association The M http:/

odel Code October 2002

/www.aciforex.com/mktpractice/model_code.htm BankThe Nhttp:/

of England on-Investment Products code May 2003

/www.bankofengland.co.uk/markets/nipscode.pdf Recenhttp:/

t amendment to the NIPs code: 8.htm /www.bankofengland.co.uk/pressreleases/2003/05

http://www.bankofengland.co.uk/markets/forex/fxjsc/


1. Introduction1.1 Controlling Risk in Todays Environment1.2 How Adoption of FXall Promotes Best Practice1.3 Summary of Key Operational & Compliance Benefits from using FXall

2. Introduction to FXall3. Best Practices Review3.1 Pre-Trade Preparation and Documentation3.2 Trade Capture3.3 Confirmation & Netting3.4 Settlement3.5 Accounting / Financial Control3.6 General Practices

4. FXalls Implementation of Best PracticesAppendix 1: How FXall Automates Customers WorkfA.1 How Does it Work?A.2 Front-OfficeA.3 Middle & Back-OfficeA.4 Reducing Settlement Risk

Appendix 2: Complete Listing of Best Practices from the Foreign Exchange CommitteeAppendix 3: List of Related Documents & Websites