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Foreign Exchange Transaction Processing: Execution to Settlement, Recommendations for Nondealer Participants

October 20, 1999

Dear Foreign Exchange Professional:

In the Reports and Documents section of this web site, you will find a new paper Foreign Exchange Transaction Processing: Execution to Settlement, Recommendations for Nondealer Participants. (pdf) The Operations Managers Working Group of the Foreign Exchange Committee authored this text.

The paper highlights sixteen operations-related topics or issues that businesses may want to review before starting to transact in the foreign exchange market. Each issue includes a list of related risks as well as recommendations--essentially "best practices"—that could remedy the risks. The recommendations have been drawn from the experience of dealers, institutions that have been active in the foreign exchange market for many years. The paper ends with a bibliography listing other Committee publications that may provide further insight into many of the issues raised in the paper.

We hope you find this paper useful. Please do not hesitate to contact myself or other members of the Committee if you have questions or comments regarding this paper or other publications of the Foreign Exchange Committee.

Sincerely yours,

Paul Kimball
Chairman

 

This simplified approach to the holiday problem obviates the need for numerous custom arrangements that would otherwise be required between counterparties. The Foreign Exchange Committee endorses the EMI's recommendation and supports its application to the settlement of foreign exchange transactions, except in rare cases where counterparties will want to negotiate value dates for specific trades.

Also attached is a list of the members of the Foreign Exchange Committee (pdf) and the Committee's Document of Organization (pdf). Please feel free to contact me, members of the Committee, or the Committee's Executive Assistant with any questions or comments regarding this letter.

  1. Dealer executes stop-loss orders as instructed only to have prices immediately rebound when liquidity returns to the market. Customers in this scenario may question why they were stopped out of positions for an apparent pricing anomaly.
  1. Dealer refrains from executing stop-loss orders because the breach occurs during illiquid off-hours conditions, but prices do not rebound when liquidity returns to the market. Stop-loss orders are ultimately executed during routine business hours, but at rates less advantageous than those prevailing during the off-hour period when the orders were first technically triggered. Customers in this scenario may allege that they were harmed because their stop-loss orders were not immediately executed when triggered at the better rate.

     To avoid disputes arising from these types of scenarios, the Committee advises that foreign exchange dealers educate customers about the special circumstances that can occur with stop-loss orders in an electronic trading environment. In particular, the Committee recommends that dealers establish guidelines with customers regarding the applicability of electronically traded prices during illiquid off-hour conditions. For example, dealers may wish to inform customers that stop-loss orders will remain valid only from Monday 6:00am Sydney through Friday 5:00pm New York, the time frame presently specified in the barrier option addendum to the Foreign Exchange and Option Master Agreement. Copies of the barrier option addendum and other Committee publications may be viewed online or downloaded for later viewing from the Foreign Exchange Committee's world wide web site, or are available by contacting the Committee's Executive Assistant.

     Also attached is a list of the members of the Foreign Exchange Committee (pdf) and the Committee's Document of Organization (pdf). Please feel free to contact me, members of the Committee, or the Committee's Executive Assistant with any questions or comments regarding this letter.

Sincerely,
  
John J. Finigan, Jr.
Chairman