The PH Model Code - Reporting
The PH Model Code - Reporting
ased on and distilled from the following recognized codes that are substantially convergent and
B
practically applicable to the Philippine Treasury markets and products:
The ACI Model Code 2013: as a global minimum standard
BSP Circular No. CL-2010-13: Code of Ethics Governing Financial Activities in the Philippines
as a regulatory framework
Ateneo-BAP Institute of Banking Treasury Certification Program Module on The Philippine Code
of Conduct & Market Practices for Treasury Activities: for ethical standards and trading
conventions grounded on “timeless values‟
Serve as “self-regulating” guidelines for the local ACI-FMA and MART to build on and to adapt, in
order to promote efficient practices and market professionalism covering over-the-counter (OTC)
foreign exchange, money and their select derivatives
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Introduction
Mission Statement: To be a leading, global One of the most important cornerstones
association of wholesale financial market and training aids for all market
professionals, contributing to the market professionals and is a compulsory
development through education, market requisite of ACI‟s exams
practices, technical advice and networking
events Covers activities in Spot and Forward FX,
Currency Options, Money market
Standard of the International Financial instruments, interest rate options, forward
Markets in terms of: rate agreements, Interest rate and
Maintaining the professional level currency swaps, and precious metals
of competence and the ethical
standards Latest version of the The Model Code
Committing to maintain the highest was launched in February 2013; first part
possible standards in their profession of the New Model Code covers „timeless
by setting an example of propriety values‟ - areas such as morals and ethics,
and best ethical behavior in business personal conduct, dealing practices and
Offering global third party certifications segregation of duties that do not change
over time
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Introduction
Timeless Values
Treasury market participants must not Management should adopt policies and
engage in act involving dishonesty, fraud, procedures to prevent general
or deceit or commit any act that reflects misconduct:
adversely on their professional reputation, Develop and/or adopt a code of ethics
integrity or competence. They must also to which every employee must
ensure that their overall conduct and subscribe and make clear that any
demeanor are appropriate with respect to personal behavior that reflects poorly
the highest standard of professionalism on the individual involved, the
as adhered to by their institution and the institution as a whole or the industry
banking industry as a whole. will be not be tolerated.
Disseminate to all employees a list of
potential violations and associated
disciplinary sanctions, up to and
including dismissal from the
institution.
Check references of potential
employees to ensure that they are of
good character and not ineligible to
the financial industry because of past
infractions of the law. | 7
Company-wide Issues
- Personal Conduct
Scope
Hours Hours
After-Hours and Off-Hours
Dealing
Holidays
Market Disruption
Market Opening and
Closing Hours
ACI-FMA coordinated global accord on observed opening and closing times
OPEN 5:00 AM Sydney Time Monday
CLOSE 5:00 PM New York Time Friday
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Business Hours
After-Hours and Off-
Premises Dealing
Management should list the dealers Management should issue clear
authorized to deal in off-premises or written guidelines to employees
after-hours transactions and stipulate regarding the limit and type of deals
a procedure for the prompt reporting that are permitted after normal hours
and recording thereof. or off-premises.
The use of mobile phones within the It would also be prudent to have an
dealing room, except when used in an unofficial in-house agreed close of
emergency, is not considered good business for each trading day against
practice. which end-of-day positions can be
monitored or evaluated (middle office
With global dealing occurring around function).
the clock there are occasions when
institutions cover their risk positions
outside the normal trading hours or
when the dealers are away from their
usual office location
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Business Hours
Holidays
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Business Hours
Ethical
Market Disruption
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Company-wide Issues
- Personal Conduct
Unethical
General Personal
Conduct
Situation/Simulation The PH Model Code states:
An FX trader received his daily Foreign Currency Employees should be aware of the
Ledger report from the Financial Control Unit of consequences of their professional,
the bank showing his consolidated FX position. ethical and social behavior. It is
That morning, the report showed a long position expected that employees will
of USD 5MM when the trader was only comply with the highest code of
expecting to be square for that day. He verifies conduct standards in all that they
with the Financial Control officer his position do for the organization, the
and the long position was caused by some market and their personal lives.
unspotted trade transactions. The USD/PHP They may be held accountable for
spot price was trading lower and he would actions or discussions which break
therefore incur a loss given his position. Out of fair market practices, and damage
frustration, he shouts and curses at the the reputation of their company
Financial Control officer. and their profession.
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Company-wide Issues
- Personal Conduct
Gambling/Betting between
Market Participants
Gambling or betting amongst market participants has
obvious dangers and should be strongly discouraged.
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Company-wide Issues
- Personal Conduct
Unethical
Gambling/Betting between
Market Participants
Situation/Simulation The PH Model Code states:
The Chief Dealer comes back from his Gambling or betting amongst
lunch break early and catches his FX market participants has obvious
traders playing poker with a little sum of dangers and should be strongly
money involved. discouraged.
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Company-wide Issues
- Personal Conduct
Entertainment & Gifts
Situation/Simulation
Beyond Anecdotal
Some traders demand excessive
entertainment from brokers and even pit
brokers against each other in terms of
who takes them out more, or spends
more or stays up latest to party with
them.
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Company-wide Issues
- Personal Conduct
Entertainment & Gifts
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Company-wide Issues
- Personal Conduct
Dealing for Personal
Account
Management should ensure that Management should establish
adequate safeguards are established guidelines concerning the following:
with regard to dealing for personal - Personal investments by dealers
account to prevent abuse or insider - Investments or deals on behalf of
dealing in any form. dealer‟s family, other members of
personnel and management
These safeguards should reflect the - Instruments and products closely
need to maintain confidentiality with related to the ones in which the
respect to non-public price sensitive dealer trades for the institution,
information, the instruments/products avoiding conflict of interests
dealers can trade for their own - Full disclosure and transparency
account, and ensure that no action is of trades for personal account,
taken by employees that might particularly where day trading for
adversely affect the interests of the personal account is allowed. This
firm‟s clients or counterparties. should ensure that the trader gives
full attention to the institution‟s
Dealers should recognize that they business.
have a responsibility to identify, avoid,
resolve and report conflict of interests
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Company-wide Issues
- Personal Conduct
Dealing for Personal
Account
Written procedures should clearly
stipulate the institution‟s control policy
in relation to „front running‟ or „parallel
running‟; where traders knowingly
execute trades in front of a customer
order.
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Company-wide Issues
- Personal Conduct
Ethical
Dealing for Personal
Account
Situation/Simulation The PH Model Code states:
An FX trader receives a call from their Where dealing for personal
Relationship Management Group (RMG) account is allowed, management
requesting for a bid price for USD/PHP for should ensure that adequate
one of their RMG client. The RMG trader safeguards are established to
casually mentions that his client was the prevent abuse or insider dealing in
FX trader‟s father. any form. These safeguards
should also reflect the need to
The FX trader decides to pass the phone maintain confidentiality with
call to another FX trader to avoid any respect to non-public price
conflict of interest. sensitive information, instruments/
products dealers can trade for
their own account, and ensure that
no action is taken by employees
that might adversely affect the
interests of the firm’s clients or
counterparties.
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Company-wide Issues
- Personal Conduct
Misinformation and
Rumors
Dealers and brokers should not relay any
information that they know to be false,
and should take great care when
discussing unsubstantiated information
that they suspect could be inaccurate and
which could be damaging to a third party.
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Company-wide Issues
- Personal Conduct
Unethical
Misinformation and
Rumors
Situation/Simulation The PH Model Code states:
An ROP bond trader heard from another trader Dealers and brokers should not
that the Republic of the Philippines was on a relay any information they know to
road show and may be issuing a USD- be false, and should take great
denominated bond. The bond trader then care when discussing
decides to sell his position before this news unsubstantiated information that
break out in the market as bond prices tend to they suspect could be inaccurate
trade lower during a bond issuance. He then and which could be damaging to a
calls his other counterparts telling them that third party.
the government is issuing a USD-denominated
bond.
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Company-wide Issues
- Personal Conduct
Confidentiality
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Company-wide Issues
- Personal Conduct
Unethical
Confidentiality
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Company-wide Issues
- Personal Conduct
Customer Relationship,
Advice and Liability
When dealing with customers, No advisory or fiduciary relationship
Treasury market professionals are exists between the parties except
advised to clarify the foregoing and where laws, rules and regulations
explicitly agreeing in writing that would qualify the service provided by
Customer understands terms, the Treasury market professional to
conditions and risk of the the customer as an advisory or
transaction fiduciary relationship.
Customer made its own
assessment and independent Customers‟ needs and objectives should
decision to enter into such determine the appropriate and suitable
transaction and is entering into Treasury services provided them such as,
the transaction at its own risk but not limited to:
and account Best trade execution
Customer understands that any Investment advisory
information, explanation or other Discretionary fund management
communication by bank shall not all of which should maximize the
be construed as an investment customers‟ portfolio value.
advice
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Company-wide Issues
- Personal Conduct
Ethical
Customer Relationship,
Advice and Liability
Situation/Simulation T he PH Model Code states:
A client of Lucas Numbers inquires and asks for a When dealing with customers, financial market professions
quote for a EUR/USD option where he buys a EUR call/ are advised to clarify the foregoing nature by explicitly
USD put. The RMG trader calls the Derivatives trader agreeing in writing the following:
to pass on this client inquiry. The RMG trader and - The customer understands the terms, conditions and
derivatives trader gave only an indicative quote. They risks for the transaction.
wanted to make sure that the client knows what he is - The customer made his or her assessment and
getting into, since options are more complex that his independent decision to enter into the transaction at
usual banking transactions, before giving a firm quote. his or her own risk and account.
- The customer understands that any information,
T hey request for a client meeting and brings with them explanation or other communication by the other party
all documentation needed such as a a Term Sheet shall not be construed as investment advice or
where all terms and conditions and risks are explicitly recommendation to enter into that transaction except
discussed and scenario analysis are made. In this in jurisdiction where laws, rules and regulations would
meeting, the RMG trader and derivatives trader qualify the given information as investment advice.
realized that the client has ample knowledge and - No advisory or fiduciary relationship exists between the
experience with options. parties where laws, rules and regulations would qualify
the service provided by the financial market
The next day, they gave their client a firm quote and the professional to the customer as an advisory or
EUR/USD option was agreed upon and all required fiduciary relationship.
documentation were signed.
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Company-wide Issues
- Personal Conduct
Company-
wide et Up
S
Segregation of Duties
Independent Risk Controls
Terms and Documentation
Issues
Segregation of Duties
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Company-wide Issues
- Setup
Ethical
Segregation of Duties
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Company-wide Issues
- Setup
Independent Risk
Controls
Initially employed with Société
Générale in its compliance
department before becoming a
trader, he was able to Market participants should have highly
manipulate the system and hide developed, adequately staffed and
his losses. fully independent
audit/compliance/control/risk
Jerome Kerviel: Lost USD 7.1 Billion
management departments covering all
“The ETF trades are not trades areas of their institution. In the
that I have done with a majority of institutions this area is
counterparty….I used the known as the middle office and may
bookings as a way to suppress be a discrete part of the treasury
the PnL losses that I have department or a separate business
accrued….”
unit within the organization of a
Kweku Adoboli: Lost USD 2.0 Billion principal.
Rigorous and transparent self-
assessments should be performed by
All First Bank Trader faked FX
internal audit departments at least
confirmation tickets to hide
positions….. Found in his annually with exceptions recorded and
computer saved as corrective action tracked.
”fakedoc.doc” Banks should offer employees the
opportunity to raise issues and
concerns anonymously and without | 42
Company-wide Issues
John Rusnak: Lost USD 691 Million fear of retribution. - Setup
Terms and Documentation
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Company-wide Issues
- Setup
Unethical
Terms and Documentation
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Company-wide Issues
- Setup
ealers and Dealing Room
D
• Role of Broker/Dealer
• Dealing Room Security
• Retaining Phone Conversations
Office
and Rollovers
• Dealing Quotations, Firmness,
Qualification and Reference
• Dealing Reciprocity in the
Relevant Markets
• Stop-Loss Orders
• Position Parking
• Rate Setting
Role of Broker/Dealer
Role of brokers is to act only as They should ensure that any brokers used
intermediaries or arrangers of deals are either authorized by the local central
(“agent”) for client banks (“principals”) bank or financial regulator or that due
diligence has been undertaken to ensure
Management of both trading institutions that the firm is fit and proper to carry out
and brokerage firms should assume an any business on the institution‟s behalf.
active role in overseeing the trader/broker
relationship Management should periodically monitor
Establish terms under which the patterns of broker and electronic
brokerage service to be rendered trading platform usage and be alert to
Be available to intercede in disputes possible undue concentration of
that may arise business.
Ensure their staffs are aware of and in
Management of brokers should impress
compliance with internal policies
upon their employees the need to respect
governing trader/broker relationship
the interests of all of the institutions
served by their firm.
Management at a trading institution is
responsible for the choice of brokers and Brokers are forbidden to act in any
electronic broking platforms. discretionary fund management capacity.
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The Front Office
- Dealers and Dealing Room
Unethical
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The Front Office
- Dealers and Dealing Room
Unethical
Dealing Room Security
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The Front Office
- Dealers and Dealing Room
Retaining Phone
Conversation
and Electronic Messages
Situation/Simulation The use of recording equipment in banks
and brokers is strongly recommended. All
Beyond Anecdotal conversations undertaken by dealers and
Bank A insists that he took the offer price.
brokers should be recorded.
Broker says in defense that nothing came
Clear guidelines regarding recording and
out from the box. The recorder is checked
retention of phone conversations and
by the Broker and there is no “hitting”
electronic messages should be defined
order from Bank A. The broker was still
and implemented. These guidelines
held to the deal because Bank A will not
should be based on legal and regulatory
listen to the recording.
requirements. Compliance with the
guidelines should be reviewed as part of
These safeguards are necessary in order regular self-assessment processes.
to ensure that such records are Normal practice is that tapes and other
accepted as credible evidence in records should be kept for at least two
resolving disputes or, in jurisdictions in months. However, firms engaged in
which this is allowed, accepted as dealing in longer-term interest rate swaps,
forward rate agreements or similar
evidence in a court of law
instruments where errors may only be
found at a later date (e.g., the first
movement of funds). | 50
The Front Office
- Dealers and Dealing Room
Ethical
Retaining Phone
Conversation
and Electronic Messages
Situation/Simulation The PH Model Code states:
The entire office of Lucas Numbers Bank The use of recording equipment in
is relocating from their Makati office to banks and brokers is strongly
Fort Bonifacio. Part of their relocation recommended. All conversations
involved changing their computers and undertaken by dealers and brokers
phone systems. should be recorded, together with
back office telephone lines used by
The Risk Management Group reminded those responsible for confirming
the Treasury Group and Operations Group deals or passing payments to
to ensure that all their phone systems other instructions.
were being recorded properly. Before the
actual transfer, a representative of each
unit in The Treasury group, together with
their IT, visited their new site to make sure
that all systems, including their phone
systems were up and working properly.
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The Front Office
- Dealers and Dealing Room
Authorization and
Responsibility for Dealing
Activity
Official recognition of individual dealers' These descriptions, which should also
roles and authority must be set out in govern relationships with customers and
writing by management so that there is no clients, should ensure that any individual
ambiguity as to the transactions, who commits the firm to a transaction has
instruments, markets or trading platform the necessary authority to do so, and
in which the dealer is empowered to might include:
trade. a. General dealing policy including
Control of the activities of all reporting procedures
personnel engaged in dealing (both b. Persons certified and authorized to
dealers and support staff) in both deal
principals and brokers is the c. Instruments to be dealt in
responsibility of the management of d. Limits on open positions, mismatch
such institutions. positions, counterparties, stop-loss
It is the responsibility of management limits, etc.;
to ensure that all employees are e. Relationships with brokers and
adequately trained and aware of their broking platforms/banks
own and their institution's f. Information/communication duties;
responsibilities. and
g. Other relevant guidance as
considered appropriate. | 52
The Front Office
- Dealers and Dealing Room
Authorization and
Responsibility for Dealing
Activity
Only dealers so authorized may negotiate Records maintained by the dealers or
deals and complete deal tickets (the their front office assistants to ensure
source document for all ensuing these responsibilities can be carried out
procedures) or effect trade capture to the include:
principal‟s front office systems for a) Open exchange position controls
onwards transmission to the operations (immediate foreign exchange dealing
department for processing and position);
settlement, preferably via Straight b) Local and foreign currency cash
Through Processing (STP) techniques. position controls (Nostro balance
management);
It is the dealers' responsibility to control c) Forward exchange time position
and manage any positions resulting from controls;
deals transacted with market d) Money market maturity records;
counterparties. If manual trade capture e) Financial markets trading portfolio
methods are used, all deals emanating controls (cash and derivatives); and
from dealing requests made by or sought f) Dynamic credit limit record update.
from the dealers should be recorded
promptly in any systems used for this
purpose.
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The Front Office
- Dealers and Dealing Room
Ethical
Authorization and
Responsibility for Dealing
Activity
Situation/Simulation The PH Model Code states:
The swap trader of Lucas Numbers dealt Dealers should refer to credit limit
a USDPHP cross currency swap records and comply with limits
amounting to USD 5MM with Jacobs allocated independently of dealing
Ladder Bank thinking that he has enough management. Where limits are
available credit lines for his counterpart. broken, dealing management may
Upon checking his credit line report, he be require to complete excess
realizes he has breached the credit limit reporting procedures.
due to previous Cross Currency Swap‟s
mark-to-market losses.
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The Front Office
- Dealers and Dealing Room
Authorization and
Responsibility for Dealing
Activity
Dealers should refer to credit limit records Management should ensure that dealers
and comply with limits allocated comply with in-house requirements
independently of dealing management. regarding the taking a minimum of two
Where limits are broken, dealing consecutive weeks holiday each year.
management may be required to Recording and monitoring of this
complete excess reporting procedures. requirement may be a centralized
HR/Personnel department function and
Dealers should be fully aware of their will be subject to annual internal audit.
employing institution‟s in-house treasury
regulations, The PH Model Code and any Where there has been a change in the
local regulatory authority requirements, individual authorized to enter into a
together with all international market transaction on behalf of the firm, it is
dealing conventions. They must ensure recognized as good practice to ensure
full compliance at all times. that such change is communicated to the
counterparties in an unequivocal manner
and in writing as soon as practicable after
such change becomes effective.
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The Front Office
- Dealers and Dealing Room
Dealing at Non-Current
Rate and Rollovers
Worked example of HRRO:
Corporate Client sells 6-mo. USD/PHP forward to a Bank on June 27, 1997 for value
December 27, 1997 at USD/PHP 26.900 for USD 10MM computed as follows:
Tom USD/PHP 26.400
Swap Points 0.500
Forward USD/PHP 26.900
Roll-Over on December 27, 1997 of Client short USD 10MM at different basis
at Tom USD/PHP 37.900
Market HRRO
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The Front Office
- Dealers and Dealing Room
Ethical
Dealing at Non-Current
Rate and Rollovers
Situation/Simulation The PH Model Code states:
T he USDPHP opened at 45.800 and an FX trader had In order to avoid
a target price to close his current short position at misunderstanding, it is
USDPHP 44.800. In the afternoon, news came out in recommended that the ‘big figure’
the market that Moody‟s upgraded the credit rating of
be included in all outright and spot
the Philippines and the peso appreciated to 44.800.
The FX trader decides to close his position and asks a FX quotations. However, it is
quote from his broker. His broker gives him a quote of common practice in both OTC and
„79-80‟ and the FX trader lifts the offer to close his centralized markets for market
position. makers to omit the ‘big figure’ in
their original quote for the sake of
His counterparty calls him on the trading platform to brevity and efficiency. This can be
verify their deal and erroneously puts 45.80, in which
done with confidence, secure in
the FX trader also erroneously confirms. At the end of
the day, the FX trader checks his trades and realizes the knowledge that the true or
their error and calls his broker to reconfirm the correct ‘big figure’ is understood
transaction. His broker looks at the time the by both parties and if necessary,
transaction was done. He checks the market data and verifiable from official market
sees that it was traded at the time that the big figure data.
was already at USDPHP 44.000 He then reconfirms
with both parties that the trade dealt was at USDPHP
44.800.
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The Front Office
- Dealers and Dealing Room
Dealing Quotations,
Firmness, Qualification
and Reference
All Treasury market participants, whether
acting as principal, agent or broker
Tom USD/PHP (including an e-trading platform), have a
44.650-44.680 duty to make absolutely clear whether the
prices they are quoting are firm or merely
indicative. Prices quoted by brokers
should be taken to be firm in marketable
amounts unless otherwise qualified.
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The Front Office
- Dealers and Dealing Room
Ethical
Dealing Reciprocity in
the Relevant Markets
Situation/Simulation The PH Model Code states:
T he Derivatives trader of Lucas Number Bank has The extent to which these
an outstanding ROP CDS transaction where he arrangements imply willingness to
sells protection at 200. The next day, news came quote, for whatever amount and at
out that Greece might go into a default. All credit how competitive a spread during
spreads, whether sovereign or corporate, were times of high volatility or crisis, is
much wider. The derivatives trader wanted to purely matter the two institutions
close his position since his MTM loss might breach concerned to understand and
his Value-at-Risk (VaR) limits soon. interpret in the light of their
evolving relationship.
The derivatives trader then requests for a quote
from his counterparty and gets a quote of
300/350. His counterparty apologizes and
explains that his bid/offer spread is wide (from his
normal 5bps bid/offer spread) because liquidity
was very thin. The derivatives trader of Lucas
Number Bank then decides not to close his
position and waits for the market to settle down
first.
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The Front Office
- Dealers and Dealing Room
Stop Loss Orders
Orders by one party (order giver) to buy or Where the terms „one touch stop‟, „all
sell a currency at or within a given range, “GTC”, „discretion‟, or any other
terminology are mentioned, the
to another party (accepting bank); have
agreement should clearly stipulate exactly
• different conditions for triggering order what is understood by their use.
• varying ramifications for “slippage” to
be incurred and what discretion is
implied
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The Front Office
- Dealers and Dealing Room
Ethical
Stop Loss Orders
| 67
The Front Office
- Dealers and Dealing Room
Rate Setting
As five of the world‟s largest banks are fined a total of £2 billion after an investigation into the rigging of the foreign exchange
market, newly released transcripts reveal the extent of the wrongdoing.
Citibank, HSBC, Royal Bank of Scotland, JPMorgan and UBS were fined for failing to stop traders from trying to manipulate the
foreign exchange market, the first settlement in a year-long global investigation. A further investigation into conduct at Barclays
continues.
In the latest scandal to hit the financial services industry, dealers shared confidential information about client orders and
coordinated trades to make money from a foreign exchange benchmark used by asset managers and corporate treasurers to
value their holdings. Dozens of traders have been fired or suspended.
And private chat room conversations published by the US Commodity Futures Trading Commission show evidence of this, as
traders at various banks plan to manipulate fixes and congratulate one another on their success.
In one example, traders from two banks “double team” as they attempt to manipulate a fix. The transcript reads as follows:
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The Front Office
- Dealers and Dealing Room
Rate Setting
Aitan Goelman
| 70
The Front Office
- Dealers and Dealing Room
Rate Setting
| 71
The Front Office
- Dealers and Dealing Room
Rate Setting
| 72
The Front Office
- Dealers and Dealing Room
Rate Setting
Present FX Market
USD 5,300,000,000,000.00/ DAY
| 73
The Front Office 73
- Dealers and Dealing Room
Unethical
Rate Setting
| 74
The Front Office
- Dealers and Dealing Room
Dealing Through
Brokers (Voice Brokers and
| 77
The Front Office
- Dealing Through Brokers
Unethical
Differences between
Brokers and Principals
Situation/Simulation The PH Model Code states:
bond trader of Lucas Numbers needed to buy a USD
A If the broker fails to conclude the
corporate bond and requests for a quote from his transaction at the quoted price and
broker. The broker gives a quote of 100.25-100.75 has to accept a lesser quote to
and the bond trader lifts the offer and the broker neutralize the risk, senior
confirms it is done. When the broker lifts the offer of management should be informed
the counterparty, the counterparty informs the broker and a dialogue between the parties
that he was just lifted and his offer is now at 101. 25.
should ensue, such that they reach
a viable solution.
The broker informs the bond trader of Lucas Numbers
Bank that he was unable to lift the offer of the
counterparty and informs him that the offer is now
101.25. Since the broker already confirmed earlier
that it was a done deal, the bond trader insists that
the trade should be done at 100.75.
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The Front Office
- Dealing Through Brokers
Ethical
Difference between
Principals
Situation/Simulation The PH Model Code states:
The FX trader of Lucas Numbers Bank calls the FX trader of Jacobs When a dispute involves the
Ladder Bank and asks for a EURPHP quote saying he needs to buy amount, currency, value date(s) or
PHP against EUR to hedge a transaction with a Corporate Client. any other factor which means that
The FX trader of Jacobs Ladder Bank gives a quote of 52.700-
one of the two parties concerned
52.750, on which the FX trader of Lucas Numbers says “Mine” and
lifts his offer for EUR 1MM (buys EUR instead of PHP). The FX had an open or unmatched
trader of Lucas Numbers Bank then confirms the deal: “This is to position, it is strongly
confirm that I buy PHP against EUR at 52.750 for EUR 1Million”. recommended that action should
And the FX trader of Jacobs Ladder Bank erroneously agrees. immediately be taken by one of
The FX trader of Jacobs Ladder then calls the FX trader of Lucas the parties concerned (preferable
Numbers Bank to confirm the deal on the trading platform. The with the agreement of the other)
trader of Lucas Numbers Bank was hitting his bid instead of his
to square off or neutralize the
offer.
Both traders listened to their system where both conversations position. Such action shall be
were recorded lines and realized where the dispute was coming seen as an act of prudence to
from. The FX trader of Lucas Numbers decides to close his eliminate the risk of further loss
opened/ unmatched position first to avoid any further losses. resulting from the dispute, and
shall not be construed as an
admission of liability by the party.
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The Front Office
- Dealing Through Brokers
Qualifying and Preliminary
Dealing Procedure
Both dealers and brokers should state
clearly at the outset, prior to a
transaction being executed, any
qualifying conditions to which it will be
subject.
If a dealer‟s ability to conclude a
transaction is constrained by other
factors (e.g., opening hours in other
centers), this should be made known
to brokers and potential
counterparties at an early stage and
before names are exchanged.
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The Front Office
- Dealing Through Brokers
Ethical
Qualifying and Preliminary
Dealing Procedure
Situation/Simulation The PH Model Code states:
X trader of Lucas Numbers Bank checks
F If a dealer’s ability to conclude a
his daily credit lines and sees that his transaction is constrained by other
credit lines for Jacobs Ladder Bank is full factors (e.g. opening hours in
due to other Treasury transactions. He other centers), this should be
tells his broker of this constraint to avoid made known to brokers and
any dealings with Jacobs Ladder Bank potential counterparties at an
until some credit lines are freed up. early stage and before names are
exchanged.
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The Front Office
- Dealing Through Brokers
Qualifying and Preliminary
Dealing Procedure
Typed Dealing Conversation
July 20xx, Friday
# Hi, Spot USD/JPY for USD 10 plse?
> 119.40 – 43 + Preliminary Negotiation
# At 43 I BUY USD 10 plse + Action
> Done, to confirm Confirmation
> I SELL USD 10MM at 119.43 value 22 July 20xx
> JPY to my Tokyo plse, where to your USD?
# USD to my New York plse +
> Agreed, thanks for the deal and BIBIFN +
# Thanks & Ciao +
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The Front Office
- Dealing Through Brokers
Qualifying and Preliminary
Dealing Procedure
Typed Dealing Conversation:
Qualifying Conditions
Wrong Way
# Hi, Spot USD/JPY for USD 10 plse?
> 119.40 – 43 +
# I BUY USD 10 plse +
> Only 5 Done, to confirm
This is a bad practice also called “cutting down the amount”.
Absence of qualification means quoted price is good for amount
requested
Proper Response:
# At 40, JPY 1 Yard plse +
> Done, to confirm
This is also called “dealing at the figures”. This is a good practice
especially when a quote for a Terms currency amount is requested
and minimizes disputes.
If the Calling Bank responds “I BUY”, the Quoting Bank by habit may
think he is SELLING USD, before he sees the amount.
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The Front Office
- Dealing Through Brokers
Consummation of a
Deal
Dealers should regard themselves as
bound to a deal once the price and
Tom USD/PHP any other key commercial terms have
44.650-44.680 been agreed. However, holding voice
brokers unreasonably to a price is
viewed as unprofessional and should
be discouraged by management.
Where prices quoted are qualified as
being subject to negotiation of
commercial terms, dealers should
normally treat themselves as bound to
deal at the point where the terms have
been agreed without qualification.
Guided by Dealer‟s Maxim Verbal agreements are considered
binding and the subsequent
confirmation is regarded as evidence
of the deal, but should not override
terms agreed verbally. The practice of
making a transaction subject to
documentation is not regarded as | 85
good practice. The Front Office
- Dealing Through Brokers
Consummation of a
Deal
YOURS!!! Where a voice broker „hits‟ a dealer‟s
price as „done‟ (or similar) at the very
instant the dealer calls „off‟, the
transaction should be concluded and the
broker should inform both counterparties
accordingly.
Conversely where the broker calls „off‟ at
the very instant a dealer „hits‟ the
!!!
OFF!!!
broker‟s price as ‟mine‟ or „yours‟ (or
similar), the deal should not be concluded
and the broker should inform both
counterparties accordingly.
In cases where a price quoted by a broker
is „hit‟ simultaneously ('yours‟, „mine‟,
etc.) by several dealers for a total amount
greater than that for which the price
concerned is valid, the broker should
apportion the amount for which the price
is valid pro rata amongst the principals
concerned in accordance with the amount
proposed by each. The Front Office
- Dealing Through Brokers
Consummation of a
Deal
“Stuffing” takes place when a broker Banks and Brokers must avoid and
loses a price or makes an erroneous prevent “stuffing”. But if “stuffing” occurs
price is required by the dealer to following must happen:
• Broker must advise dealer
commit on the missed or erroneous
immediately
price; latter price usually worse than • Bank and Broker must record
prevailing market price “stuffing” occurrence and details
• Broker must close out transaction with
another counterparty at next best
price regardless of price
• Such action shall not be construed as
an admission of liability by that party.
• “Difference” must be settled with a
check payable to bank; NEVER settled
in “points” owed by the broker
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The Front Office
- Dealing Through Brokers
Consummation of a
Deal
Situation/Simulation All compensation should take the form of
a bank transfer payment in the name of
Beyond Anecdotal the institution or adjustment to brokerage
Bank “stuffs” the broker but refuses to
bills.
accept a check for the difference. Broker
has to look for a switching bank who is
All such transactions should be fully
willing to book the loss and take the
documented by both the principal and the
check from the broker for the difference.
voice broker. It is considered bad practice
to refuse a broker‟s compensation for the
amount concerned and to insist on a
name at the original price.
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The Front Office
- Dealing Through Brokers
Consummation of a
Deal
In order to minimize the likelihood of Dealers are expected to be committed to
disputes arising once documentation the bids and offers they propose through
is prepared, principals should make voice brokers for generally accepted
every effort to agree all material points market amounts unless otherwise
quickly during the verbal negotiation of specified and until the bid or offer is:
terms and should agree any remaining
details as soon as possible thereafter. o dealt on;
The use of point of deal electronic o cancelled;
confirmation and documentation
platforms and systems (so-called and especially through voice brokers:
hybrid systems) is strongly o superseded by a better bid or offer; or
encouraged. o the broker closes another transaction in
Where voice brokers are involved, it is that currency with a different counterparty
their responsibility to ensure the at a price other than that originally
principal providing the price or rate is proposed.
made aware immediately it has been
dealt upon. In cases of the third and fourth items, the
As a general rule, a deal should only broker should consider the original bid or
be regarded as having been done offer no longer valid unless reinstated by
where the voice broker's contact is the dealer.
positively acknowledged by the dealer.
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The Front Office
- Dealing Through Brokers
Unethical
Consummation of a
Deal
Situation/Simulation The PH Model Code states:
n FX trader wanted to buy USD against
A Where a voice broker ‘hits’ a
PHP and left a bid with his broker. He dealer’s price as ‘done’ (or similar)
then gets a call on the trading platform at the very instant the dealer calls
from one of his counterparties in which he ‘off’, the transaction should be
gave a quote to and his offer was lifted. concluded and the broker should
Since he initially wanted to be long USD, inform both counterparties
he tries to square of this position and accordingly.
says „mine‟ on his broker box.
Simultaneously, his broker says „off‟. Conversely, where the broker calls
‘off’ at the very instant a dealer
is broker confirms that no trade was
H ‘hits’ the broker’s price as ‘mine’ or
done as his offer was already lifted and ‘yours’, the deal should not be
he already called „off‟. The USDPHP rate concluded and the broker should
has traded higher and offers were much inform both counterparties
higher. The FX trader insists his trade accordingly.
should have been done as he said „mine‟
simultaneously and stuffs his broker.
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The Front Office
- Dealing Through Brokers
Commission in Broking
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The Front Office
- Dealing Through Brokers
Ethical
Commission in Broking
| 92
The Front Office
- Dealing Through Brokers
Passing of Names
Practices
Post-trade Standards
and Practices
| 98
Post-trade Standards
And Practices
Confirmation of Trades
| 99
Post-trade Standards
And Practices
Confirmation of Trades
| 101
Post-trade Standards
And Practices
Netting
| 103
Post-trade Standards
And Practices
Security Fraud
Money Laundering and Terrorist
Finance
Fraud
| 106
General Security
Money Laundering and
Terrorist Finance
Effective training form staff in front,
middle and back offices to
Recognize an offense or form a
suspicion on responsible grounds
Know whom to report within the bank
Promptly report suspicions while not
revealing their knowledge or
suspicions to the suspected criminal
or terrorist
| 109
General Security
Why Ethics Matters in
Trading
eneral Risk Management Principles for
G
The Dealing Business
Principle I: Promote the highest standard
of conduct and ethics
Market
• Honor, honesty and integrity must be
the underlying principles of trading
Decentralized (OTC) and unregulated practices.
| 110
General Security
Standard Amounts
| 111
excursus |ɪkˈskəːsəs
Key Market
Terminology
Key Dealing Terminology
Basis points One-hundredth of 1 per cent in an interest rate, i.e., .01% or .0001
e.g., difference between 1.75% and 1.50% is 20 basis points or
.20%
Bid Rate at which the Market maker is willing to buy the commodity
(base) currency
Spot and Forward: the rate at which the Market maker is willing to
buy the Commodity (Base) currency
FX Swap: the rate at which the Market maker is will to sell spot
and buy Forward the Commodity (Base) currency
Money Market: the rate at which the Market maker is willing to
pay (borrow) funds
Checking Availability of a credit limit is being checked before the deal can be
agreed
Choice Quoted BID and OFFER price is the same, e.g., quote of Tom
USD/PHP “45.150 Choice” means Market maker is willing to buy or
sell USD at 45.150
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Key Market Terminology
Dealing Terminology
Terminology Definition
Discount Forward FX rate is lower than Spot FX rate; Discount is the difference
between the Forward rate and the Spot rate; opposite of Premium
Either way Quoted BID and OFFER price is the same; same as Choice
| 116
Key Market Terminology
Dealing Terminology
Terminology Definition
Full (amount) Used to indicate that the price seeking bank wishes to conclude the
total amount in one deal
| 117
Key Market Terminology
Dealing Terminology
Terminology Definition
My Risk Acknowdgement by the dealer receiving the quote that the rate may
have to be requoted at the receiver‟s risk
Nothing Done No transaction has been dealt
Outright price Any foreign exchange price for delivery on any date that is not part
of an FX swap transaction; may be outright spot or outright forward
Paid or Taken Deal has been proposed and agreed at the offered price quoted
Par Forward FX price and Spot FX price are equal, i.e., the Commodity
Currency is neither at a discount nor at a premium (Swap points are
zero)
Pip Last significant digit of an FX quote, e.g.
EUR/USD 1.2020, .0001 is 1 pip
USD/JPY 119.50, .01 is 1 pip
USD/PHP 45.125, .001 is 1 pip
Premium Forward FX rate is higher than Spot FX rate; Premium is difference
between the Forward rate and the Spot rate; opposite of Discount
Risk Term used by Quoting Bank to advise Calling Bank that the quoted
rates are subject to change, e.g., “Your risk”
| 119
Key Market Terminology
Dealing Terminology
Terminology Definition
Sell, Offer The rate at which the Market maker is willing to sell the commodity
(base) currency
Spot and Forward: the rate at which the Market maker is willing to
sell the Commodity (Base) currency
FX Swap: the rate at which the Market maker is will to buy Spot
and sell Forward the Commodity (Base) currency
Money Market: the rate at which the Market maker is willing to
lend (receive) funds
Short (Oversold) FX risk position wherein total Foreign Currency sales exceed total
Foreign Currency purchases; total includes balance sheet items and
contingent items such as value Tom, value Spot and forward FX
transactions
Shorts (Short Refers to all transactions with value date taking place within 30 days
dates)
Spot/Next Tenor with near leg on the Spot value date and a far leg on the next
business day after Spot value date
| 120
Key Market Terminology
Dealing Terminology
Terminology Definition
Square FX Position wherein bank has sold and purchased an equal amount
of the same Foreign Currency (zero FX position)
Taken, Paid Term used if Offer Price has been dealt (also “Lifted”)
Tom/Next FX Swap with near leg one day from trade date (tom value) and far
leg on the next business day (spot value date)
Under reference A qualification stating that the rate quoted (in the market) may no
longer be valid and requires confirmation before any trades can be
agreed.
Value Date The settlement date of a foreign exchange transaction, i.e., date when
the contracted exchange of payments is effected
Value Spot Settlement Date at two business days from Trade Date
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Key Market Terminology
Dealing Terminology
Terminology Definition
Value Tom Settlement Date at one banking/clearing day from the Trade Date
Tom/Next FX Swap with near leg one day from trade date (Tom value) and far
leg on the next business day (Spot value date)
Yours, I Sell, I Proposal to deal
Give Spot and Forward: the rate at which the Price taker sells the
Commodity (Base) currency
FX Swap: the rate at which the Price taker buys Spot and sells
Forward the Commodity (Base) currency
Money Market: the rate at which the Price taker is lends funds
| 122
Key Market Terminology
Dealing Terminology
Terminology Definition
| 123
Key Market Terminology
Miscellaneous
Terminology
Terminology Definition
Base currency In foreign exchange markets, the base currency is the first currency
in a currency pair. The second currency is named the quote currency,
counter currency or term currency. Exchange rates are quoted in per
unit of the base currency. Note that FX market convention is the
reverse of mathematical convention.
Cash The means by which non-deliverable financial instruments (usually
settlement derivatives such as FRA) are settled with reference to a pre-specified
market settlement rate such as BBA Libor.
Forward/forwar Value any forward date against any other forward date. Can apply to
d both money market and FX instruments.
| 125
Key Market Terminology
Miscellaneous
Terminology
Terminology Definition
Non-Deliverable Forward exchange contracts where the counterparties have agreed
Forwards (NDF) in advance to non-delivery with cash settlement instead, at maturity,
by reference to the prevailing spot rate as quoted by a
predetermined source.
| 127
Key Market Terminology
General Risk
Management
Principles for
Dealing Activities
General Risk
Management Principles
for Dealing Business
Organizational structure should ensure
independent risk management and
controls
| 129
General Risk
Management Principles
for Dealing Business
1. Promote the highest standard of 4. Ensure involvement of thoroughly
conduct and ethics professional management in all
Honor, Honesty and Integrity administrative processes
must be underlying principles Priority to minimize deal input
of trading practice cycles, errors, downtime;
2 Ensure Senior Management identify and rectify weaknesses,
involvement and supervision disconnects and fails
Senior management to 5. Provide appropriate systems and
establish, enforce, and operational support
regularly review risk Systems for timely
management framework documentation, processing and
3. Organizational structure ensures reporting; technology policy to plan for
independent risk management controls system support
Complete segregation of duties 6. Ensure timely and accurate risk
between front, middle and measurement
back office activities Positions marked to market
daily by independent function;
frequency of market valuation
increased when warranted by
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volatility weaknesses.
General Risk
Management Principles
for Dealing Business
7. Control market risk exposure by 9. Consider impact of diversification and
assessing maximum likely exposure under risk-return trade-offs
various market conditions Rational diversification of
Impact on firm‟s earnings, trading and customer activities
liquidity and capital position to reduce risk
regularly assessed under 10. Accept only highest and most rigorous
adverse conditions, and client relationship standards
stressful scenarios Ensure that clients have an
8. Always recognize importance of market authority to undertaker
and cash flow liquidity transactions
Potential cost of unwinding Financial institutions or Broker
positions, especially in illiquid firms should not knowingly
markets should be assessed; conduct business with clients
liquidity contingency plan for involved in business activities
crisis situations should be in known to be illegal or
place inconsistent with generally
accepted standards of ethical
or social behavior in
community
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