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The PH Model Code - Reporting

The Philippine Code of Conduct and Market Practices for Treasury Activities aims to train and certify Treasury market participants in ethical behavior and adherence to global standards. It serves as self-regulating guidelines to promote professionalism in over-the-counter foreign exchange and money markets. The document outlines standards for personal conduct, compliance with laws, and specific trading conventions to ensure integrity within the financial industry.
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© © All Rights Reserved
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0% found this document useful (0 votes)
66 views130 pages

The PH Model Code - Reporting

The Philippine Code of Conduct and Market Practices for Treasury Activities aims to train and certify Treasury market participants in ethical behavior and adherence to global standards. It serves as self-regulating guidelines to promote professionalism in over-the-counter foreign exchange and money markets. The document outlines standards for personal conduct, compliance with laws, and specific trading conventions to ensure integrity within the financial industry.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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introduction ​.

​The Philippine Code of Conduct and Market Practices for


Treasury Activities or The PH Model Code
​Primary Objective: To provide the requisite training and compulsory certification exam through the
Ateneo-BAP Institute of Banking Treasury Certification Program on the behavior and conduct of
Treasury market participants to adhere to a moral compass and global set of standards that are
universally applicable and to conform to the local trading conventions covering the individual
markets they trade in, focused on the front-office and dealing activities

​ 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
| 3
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
| 4
Introduction
Timeless Values

The Guiding Principle That Has Held Markets Together

„Timeless Values‟: morals and ethics, personal conduct, dealing


practices and segregation of duties that do not change over time
| 5
Introduction
Professionalism

A. Knowledge of the Law Treasury market participants should:


Financial market professionals should
comply with the regulatory requirements Stay informed thru the Compliance
issued by the Bangko Sentral ng Pilipinas Department who should provide
(BSP) and the Securities and Exchange information on the changes of the
Commission (SEC) relevant to the banks‟ relevant laws, rules and regulations;
trading activities in the money markets, issues and developments in the products
foreign exchange, fixed income securities and markets thru external training and
and derivatives. attending industry fora

B. Knowledge of Trading Conventions Review procedures to ensure that


Management must ensure that only compliance procedures reflect current law
certified Treasury Professionals are and provide guidance to what is
allowed to trade. Market participants permissible conduct under the law
should be trained and knowledgeable on
the standard trading conventions of the Management should ensure all employees
products they are trading, which they are are fully aware of all rules and laws within
expected to adhere to at all times.
the industry and the consequences of
ignoring them | 6
Introduction
Professionalism

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

BUSINESS HOURS SETUP


 Market Opening and Closing Hours  Segregation of Duties
 After-Hours and Off-Hours Dealing  Terms and Documentation
 Holidays
 Market Disruption THE FRONT OFFICE
Dealers and Dealing Room
COMPANY-WIDE ISSUES • Role of Broker/Dealer
Personal Conduct • Dealing Room Security
 General Personal Conduct • Retaining Phone Conversations and
 Drugs, Alcohol and Substance Abuse Electronic Messages
 Gambling/Betting between Market • Authorization and Responsibility for
Participants Dealing Activity
 Entertainment and Gifts • Dealing at Non-Current Rates and
 Dealing for Personal Account Rollovers
 Misinformation and Rumors • Dealing Quotations, Firmness,
 Confidentiality Qualification and Reference
 Customer Relationship, Advice and • Dealing Reciprocity in the Relevant
Liability Markets
• Stop-Loss Orders
• Position Parking
• Rate Setting | 8
Introduction
Scope

THE FRONT OFFICE SECURITY


​Dealing Through  Fraud
​Brokers (Voice Brokers and Electronic Broking  Money Laundering and Terrorist
Platforms) Financing
 Differences Between Brokers and
Principals EXCURSUS
 Qualifying and Preliminary Dealing  Key Market Terminology
Procedures  General Risk Management Principles
 Consummation of a Deal
 Commission on Broking
 Passing of Names The PH Model Code covers the following OTC and
 Name Substitution off-balance-sheet instruments:
 Money & Capital Market Instruments
POST-TRADE STANDARDS AND PRACTICES  Forward Rate Agreements
 Confirmation of Trades  Spot FX
 Netting  FX Forwards and Swaps
 Settlements
 Currency Options
and the related Treasury activities among
dealers/brokers (voice and electronic) and their
counterparties and the supporting functions | 9
performed by mid- and back-office personnel
Introduction
Business  Market Opening and Closing

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

Philippine Official Trading Hours


AM Session 09:00 – 12:00
PM Session 14:00 – 16:00
Trades transacted outside this window are done so in conditions that are not
considered to be normal market conditions or market hours to determine
applicable intra-day and overnight limits to these trades
| 11
Business Hours
Ethical
Market Opening and
Closing Hours
​Situation/Simulation ​The PHP Model Code states:
​On 28 March 20xx, Maundy Thursday, the The official recognized opening
FX trader of Lucas Numbers Bank leaves and closing hours of currency
with an Australian Bank a buy order for markets will be set 5.00 AM
AUD against USD at 0.8000. The order Sydney time on Monday to 5.00
was good until cancelled (GTC). On April PM New York time on Friday, all
1, the AUDUSD traded at 0.8000 year round, except when special
following the ECB rumors on Quantitative arrangements are made around
Easing and BOC cutting interest rates. certain holidays, such as the New
Year, etc.
​The order was filled and done at 5.00 AM
Sydney time.

| 12
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
| 13
Business Hours
Holidays

 It is market practice to extend ​Worked Examples: Roll-over to the next


contracts maturing on a non-business business day
day to the next business day on
Unscheduled Holidays.
 Value dates in foreign exchange
​Foreign Exchange
transactions the affected parties
​Long FX Position:
should agree to adjust the exchange
​Sell/Buy @ mid swap points
rate according to the prevailing
relevant forward mid swap points at
​Short FX Position:
the time the bank holiday is
​Buy/Sell @ mid swap points
announced. Value dates will not be
split.
 For interest bearing transactions, ​Money Market
interest will be paid by the deposit Excess Liquidity: Lend
taking party at the original transaction
dealing rate up to the next available Deficit Liquidity: Borrow
business day in the currency center ​
concerned, e.g., overnight
| 14
Business Hours
Ethical
Holidays

​Situation/Simulation ​The PH Model Code states:


On January 5, an FX trader deals a forward ​On Unscheduled Holidays, unless
USDPHP transaction for value 15 January the bilateral agreements between
2015 wherein he buys USDPHP at 45.200. the parties concerned specifically
Current rate then was USDPHP 45.000. At provides for such situations, it is
the end of the day, the Philippine market practice to extend
government declares holidays on 15 contracts maturing on non-
January, 16 January and 19 January 2015 business day to next business day.
due to the arrival of the Pope.

The FX trader decides to call his


counterparty and they agreed to adjust their
value date to 20 January 2015, which is the
next business day. They also agreed to
adjust the forward rate by adding swap
points of 120 or PHP .120 for the additional
6 days. The adjusted forward rate was then
USDPHP45.320.
| 15
Business Hours
Market Disruption

​Instances where parties are prevented ​Market participants are encouraged to


from performing their obligation under a provide for these events in their contracts;
transaction due to an event, which was use standard languages developed by
not foreseeable at the time the various industry groups to cover these
transaction was entered into and beyond types of events and consequences of
the parties control, e.g., capital controls, such events on contractual obligations

Illegality or Impossibility of Performance,
Acts of God, Illiquidity, etc.

| 16
Business Hours
Ethical
Market Disruption

​Situation/Simulation ​The PH Model Code states:


L​ ucas Numbers Bank had an outstanding USDPHP If the rule or procedure is not
Cross Currency Swap deal with Jacobs Ladder Bank. mandatory in nature, the parties
On settlement date, there was a bomb threat in the should consult with each other
office of Lucas Numbers Bank and all employees were whether they wish to adhere to the
asked to evacuate their building. Since all traders terms of the agreement or to
and operations officers had no access to their system, amend the terms of the
it would be difficult to settle any of their transactions. transaction to follow the relevant
procedure.
​The Derivatives trader of Lucas Numbers Bank then
calls his counterpart from Jacobs Ladder Bank and
requests for settlement to be moved to the next
business day. The Derivatives trader of Jacobs
Ladder, after coordinating with their Liquidity desk
and Operations officer, agreed to this request and
amends their settlement date. He, however, requests
the derivatives trader of Lucas Numbers to put
everything in writing as soon as he gets access to
their email.
| 17
Business Hours
​Personal Conduct

Company-  General Personal Conduct


 Drugs, Alcohol and Substance
Abuse

wide  Gambling/Betting between


Market Participants
 Entertainment and Gifts
 Dealing for Personal Account

Issues  Misinformation and Rumors


 Confidentiality
 Customer Relationship, Advice
and Liability
General Personal
Conduct
 Treasury market participants should  Management should ensure that
be made aware of the consequences policies are in place in order that
of their professional, ethical and social business is conducted within the
behavior. framework of applicable professional
and ethical standards, laws,
 It is expected that they will comply with regulations and internal policies
the highest code of conduct standards which, additionally, should have
in all that they do for the organization, procedures to deal with individuals
the market and in their personal lives. who have acted inappropriately.

 They may be held accountable for any


actions or discussions which break fair
market practices, and damage the
reputation of their company and their
profession.

| 19
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.

The Treasurer, being a witness to the FX trader‟s


unethical behavior, talks to the him and warns
him that this behavior is not acceptable.
| 20
Company-wide Issues
- Personal Conduct
Drugs, Alcohol and
Substance Abuse
 Management should take all reasonable steps to
educate themselves and their staff about possible
signs and effects of the abuse of drugs, including
alcohol and other substances.

 Policies should be developed and clearly announced,


Traders paid to including penalties for individuals who are found to
use professional be substance abusers.
judgment on
market should  Drugs and abused substances are not permitted
inside dealing rooms and, as such, users are not
avoid allowed to enter the trading room under such
substances that influence.
impair that
judgment
.

| 21
Company-wide Issues
- Personal Conduct
Gambling/Betting between
Market Participants
 Gambling or betting amongst market participants has
obvious dangers and should be strongly discouraged.

 Making or arranging of bets among Treasury market


participants is expressly forbidden. There should be
no gambling within dealing rooms.

 It is strongly recommended that management has a


clearly defined, written policy on the control of
gambling.

| 22
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.

T​ he Bank doesn‟t have a formal internal


policy on gambling or betting but the Chief
Dealer reminds his traders that this is an
unethical behavior and that gambling or
betting is strongly discouraged in the
dealing room.

| 23
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.

​A well-known story: A trader inviting a


broker out on a weekend and having the
broker foot the party bill for the trader and
his family/friends.

| 24
Company-wide Issues
- Personal Conduct
Entertainment & Gifts

 Employees must never offer  Management should monitor the form,


inappropriate inducements to conduct frequency and cost of
business, nor solicit them from the entertainment/gifts that the dealers
personnel of other institutions receive, and have a clearly articulated
expected to compromise their own policy towards the giving/receipt
independence and objectivity. thereof, ensuring it is properly
observed.
 Financial Institutions should establish
clear policies and guidelines on when  Management should establish
how entertainments and gifts are procedures for dealing with gifts
used, supervised and monitored. At judged to be excessive but which
the minimum, policies should require cannot be declined without causing
disclosure of details of the offence, and ensure the transparency
entertainment and gifts, with of all offers of entertainment, whether
disclosure to be submitted monthly to received or provided.
the Compliance Officer.
 Entertainment should neither be
offered nor accepted where it is
underwritten but not attended by the
host. | 25
Company-wide Issues
- Personal Conduct
Ethical
Entertainment & Gifts

​Situation/Simulation ​The PH Model Code states:


An FX trader receives from the Bangko Management should monitor the
Sentral ng Pilipinas a gift basket for form, frequency and cost of
Christmas. The Bank has an internal entertainments/ gifts that the
policy wherein they are not allowed to dealers receive, and have a clearly
receive any gifts, no matter how articulated policy toward the
inexpensive, from any government giving/receipt thereof, ensuring it
institutions. is properly observed.

The FX trader decides to call the BSP


official who sent the gift basket and
graciously declines and returns the gift
basket explaining their internal policy.

| 26
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
| 27
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.

 There should be a full disclosure and


transparency requirement, ensuring
that the traders give their full attention
to their institution‟s business without
being distracted by personal financial
concerns.

 Client transactions must take


precedence over transactions made
on behalf of the dealer‟s institution or
dealer‟s personal transactions

| 28
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.

| 29
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.

Includes misrepresentation which is an


untrue statement or omission of a fact or
any statement that is otherwise false or
misleading.

Information-based manipulation, includes


but is not limited to spreading
misinformation and rumors.

| 30
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.

Later that day, the bond trader finds out that


the government only went out for a non-deal
road show and they decided to issue the USD-
denominated bond later in the year. His
unethical behavior though has already caused
bond prices to trade lower.
| 31
Company-wide Issues
- Personal Conduct
Confidentiality

​Confidentiality is essential for the Recommended Practices to Maintain


preservation of a reputable and honest Confidentiality
market place. The PH Model Code  Dealers/Brokers should not visit each
stipulates that firms must have clearly other‟s offices except with express
documented policies and procedures in permission of management of both
place, and strong systems and controls to parties
manage confidential information within  Dealers should not deal from within a
the dealing environment and other areas broker‟s office
of the firm which may obtain such  Brokers should not arrange deals from
information. Any breaches of this should outside their office
be investigated immediately according to  Dealer should not place an order with
a properly documented procedure. The a broker to find out a counterparty in
process of investigation should also be order to make direct contact to
comprehensively documented. Brokers conclude the deal
will include voice brokers and electronic  Dealers should not ask nor pressure a
broking platforms. broker to information which would be
improper to divulge

| 32
Company-wide Issues
- Personal Conduct
Confidentiality

​Situation/Simulation Use of Confidential Information


A Prop trader has a short EURUSD. It is in  Dealers and sales staff should not,
his interest to ensure that the EURUSD with intent or through negligence,
moves lower, so that he can close out his profit or seek to profit from
short position at a lower price and gain confidential information, nor assist
the difference. He therefore spreads the anyone with such information to make
word among other traders that he has a a profit for their firm or clients. Hence,
large client order to sell EURUSD, the employees have a duty to familiarize
implication being that he will be themselves with the requirements of
attempting to force the EURUSD lower the relevant legislation and
towards EURUSD fix. regulations governing insider dealing
and market abuse in their jurisdiction.

 Dealers should refrain from trading


against confidential information, and
they should never reveal such
information outside their firms.

| 33
Company-wide Issues
- Personal Conduct
Unethical
Confidentiality

​Situation/Simulation ​The PH Model Code states:


​An FX trader of Lucas Numbers Bank wants to A principal should not place an
open a long position amounting to a total of order with a broker to find out the
USD 5MM and leaves an order with his broker name of the counterparty in order
to buy USDPHP 5MM at 44.800. to make direct contact to conclude
the deal.
​His broker comes back and tells him that his
order has been filled. The broker confirms that
his counterparty is Jacobs Ladder Bank and
that his counterpart is still willing to sell
another USD 2MM at 44.800. The FX trader of
Lucas Numbers Bank tells his broker that he is
only good up to USD 1MM but directly calls the
FX trader of Jacob Ladder Bank to ask for his
offer. The FX trader of Jacobs Ladder Bank
declines and doesn‟t give a quote because of
the unethical behavior by the FX trader of
Lucas Numbers Bank.
| 34
Company-wide Issues
- Personal Conduct
Confidentiality

Control of Confidential Information


An “insider” is anyone in possession of  “Chinese Walls” to restrict internal
material non-public information; has distribution of confidential information
decision to buy, sell or hold asset class to those who need to know in order to
execute customer orders or for
compliance purposes; method of
protecting objectivity independence

 Sanctions available and used by


management against staff who do not
comply with policy or procedures, or
breach controls

 Keep information confidential unless:


- it concerns illegal activities on the
not yet disclosed to public, when party of client
disseminated will affect asset class - disclosure is required by law
- the client permits disclosure of
prices
information
| 35
Company-wide Issues
- Personal Conduct
Customer Relationship,
Advice and Liability
​Bankers Trust (BT) was sued by four of ​Suitability Risk: loss resulting from bank
major clients who asserted that BT had selling products to clients who lack
misled them with respect to the riskiness financial sophistication, knowledge of
and value of derivatives that they had product/transaction and capacity to
purchased. The first 3 cases were settled absorb financial losses (risk capital).
out of court for a total of USD 93MM and
the last case which involved Procter & ​Related to fiduciary risk which involves
Gamble (P&G) was settled at a net gain to the possibility of a trustee/agent not
P & G of USD 78MM. The most lasting optimally performing to the beneficiary‟s
damage, however, was to BT‟s reputation. best interest.

​The root cause appears to have been that


BT‟s client felt that BT had unfairly
exploited their comparative lack of
sophistication in handling complex
derivative products. For example, P & G
involved bet on stable to lower USD
interest rates with 20x leverage.

| 36
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
| 37
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.
| 38
Company-wide Issues
- Personal Conduct
Company-
wide ​ et Up
S
 Segregation of Duties
 Independent Risk Controls
 Terms and Documentation

Issues
Segregation of Duties

Lessons from Leeson  Operations management should


ensure that clear segregation of duties
exists within operations.
 If a separate middle office exists, then
their duties, as opposed to
processing/operations staff, should be
clearly defined.
 Dealers should take no part in the
processing or settlement of
 Absence of functional segregation transactions, nor have any managerial
between trading and settlement responsibility or influence over
 Lack of internal controls operations personnel.
 Inadequate management oversight  The distinct duties should be reflected
 Overleverage and bad market call in separate reporting lines.
 Dealer’s ego and greed
 Limited understanding regarding the
product

| 40
Company-wide Issues
- Setup
Ethical
Segregation of Duties

​Situation/Simulation ​The PH Model Code states:


It is the end of the month and the Risk Market participants should have
Management Group needs to do their highly developed, adequately
month-end mark-to-market duties. One of staffed and fully independent
the USD corporate bonds that the audit/ compliance/ control/ risk
Treasury team has in their portfolio is management departments
illiquid and is difficult to get a market covering all areas of their
price. The Risk Officer decides to call institution. In the majority of
their Treasury‟s bond trader to request for institutions this area is known as
an indicative price. the middle office and may be a
discrete part of the treasury
Since the bond trader may give a price department or a separate business
that is favorable to their portfolio, the Risk unit within the organization of a
Officer requests from the bond trader to principal.
get quotes from 3 counterparties and to
have these quotes documented.

| 41
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

Legal documentation covering  When trading any of the products,


instruments and transactions should be dealers and voice brokers should
completed and exchanged, and the use, make it clear whether or not they
wherever possible, of standard terms and propose to use standard terms and,
conditions to facilitate this process is where changes are proposed, these
recommended. Standard terms and should also be made clear. If these
conditions have been issued by various changes are substantial (e.g., change
authorities for many instruments. of ownership of the counterparty or to
an underlying guarantee), it is
recommended that these
amendments are negotiated and
agreed before the consummation of
the deal.

 For instruments where standard terms


do not exist, particular care and
attention should be paid to negotiation
of terms and documentation.

| 43
Company-wide Issues
- Setup
Unethical
Terms and Documentation

​Situation/Simulation ​The PH Model Code states:


A Derivatives trader transacts a USDPHP Legal documentation covering
Cross Currency Swap transaction with instruments and transaction
another bank for value T+3 days. After should be completed and
the deal was transacted and confirmed exchanged, and the use, wherever
thru Reuters, the Derivatives trader possible, of standard terms and
realized that he did not have an existing conditions to facilitate this process
ISDA agreement with his counterparty. An is recommended. Standard terms
ISDA agreement is a documentation and conditions have been issued
required before counterparties can by various authorities for many
transact swap transactions. instruments.

The derivatives trader then calls his


counterparty and they agreed to negotiate
their ISDA agreement and sign it before
the the value date.

| 44
Company-wide Issues
- Setup
​ ealers and Dealing Room
D
• Role of Broker/Dealer
• Dealing Room Security
• Retaining Phone Conversations

The Front and Electronic Messages


• Authorization and Responsibility
for Dealing Activity
• Dealing at Non-Current Rates

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.
| 46
The Front Office
- Dealers and Dealing Room
Unethical

​Situation/Simulation ​The PH Model Code states:


​The Treasurer approves all payments Senior management should
made to their brokers representing their periodically monitor the patterns
brokers fee. He noticed that the Fixed of broker and electronic trading
income Desk had most fees paid to platform usage and be alert to
Broker A and noticed that 61.8% of their possible undue concentration of
transactions went to Broker A. business.

​The Treasurer further investigates, and


finds out that one of the Fixed Income
traders is being covered by his cousin
from Broker A. He then requests the head
of Broker A to transfer the trader‟s cousin
to cover other institutions, excluding
Lucas Numbers Bank from his list, and to
transfer another broker to cover Lucas
Numbers to avoid any conflict of interest
and any concentration of business.
| 47
The Front Office
- Dealers and Dealing Room
Dealing Room Security

​Management of institutions with active


treasury departments should have strict
security measures in place covering
treasury personnel, dealing room
equipment and access to the treasury
department and dealing room in
particular
 Access to dealing room by both non-
treasury personnel and visitors should
be limited in terms of frequency and
duration
 All staff should be vigilant and
immediately report to Management
any suspicious activities or unusual
requests for access to or information
on treasury business or systems

| 48
The Front Office
- Dealers and Dealing Room
Unethical
Dealing Room Security

​Situation/Simulation ​The PH Model Code states:


A trader of Lucas Number Bank forgot his Users should not have access to
ID which also gives him access to the change system functionalities. All
dealing room. His fellow traders let him systems should have a clear
thru the dealing room since he is an business ownership assigned and
authorized trader of the Bank. The trader, all changes to a system must be
however, need to leave the dealing room approved by the business owner.
shortly and decides to borrow another
traders ID and access card.

A Senior Officer was a witness to this


unethical behavior and warned both
traders that this is unacceptable.

| 49
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.

| 51
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.
| 53
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.

​The swap trader then calls their Risk


officer to report his breach in credit lines.
The Risk officer requests for a memo
reporting his breach and signed by both
the head of Treasury and head of Risk
Management.

| 54
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.

| 55
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

Roll-over of Forward Buy 36.900 26.900


Swap Points 100 and
New Forward rate Sell 37.900 27.900

At HRRO of USD/PHP 26.900, instead of at market of USD/PHP 36.900, Client


does not realize the MTM loss of PHP 10.000

“HRRO” allows firm to evade mark-to-market process; a dangerous practice


| 56
The Front Office
- Dealers and Dealing Room
Dealing at Non-Current
Rate and Rollovers
T​ he PH Model Code strongly discourages
such practices as these may result in
 Concealment of a Profit or Loss
 Perpetration of a fraud or tax evasion,
or
 Giving unauthorized extension of
credit
 Evasion of taxes

​However if done, non-current rates may


only be used with
 Express permission of Senior
Management of both counterparties
 Proper controls and clear audit trails
for monitoring and reporting of such
transactions
 Cash flow implications taken into
account in pricing

| 57
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.
| 58
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.

​For their part, voice brokers should make


every effort to assist dealers by checking
with them from time to time whether their
​A dealer quoting a firm price (or rate), interest at a particular price or rate is still
either through a voice broker, on an e- current. What constitutes a marketable
trading system or directly to a potential amount varies from market to market, but
counterparty, is committed to deal at that will generally be familiar to those
price (or rate) in a marketable amount operating in that market.
provided the counterparty name is
acceptable.
| 59
The Front Office
- Dealers and Dealing Room
Dealing Quotations,
Firmness, Qualification
and Reference
Where dealers are proposing to deal in A principal who quotes a rate or spread as
unfamiliar markets through a broker, it is firm subject to credit is bound to deal at
recommended that they first ask brokers the quoted rate or spread if the name is
what amounts are sufficient to validate consistent with a category of counterparty
normal quotations. If their interest is in a previously identified for this purpose. The
smaller amount, this should be specified only exception is where the particular
by the dealer when initially requesting or name cannot be done, for example, if the
​offering a price to the broker. principal has reached its credit limit for
that name, in which case the principal will
correctly reject the transaction.

​It is not an acceptable practice for a


principal to revise a rate, which was firm
subject to credit once the name of the
counterparty has been disclosed. Voice
brokers and principals should work
together to establish a range of
institutions for whom the principal‟s rate
is firm subject to credit.
| 60
The Front Office
- Dealers and Dealing Room
Ethical
Dealing Quotations,
Firmness, Qualification
and Reference
​Situation/Simulation ​The PH Model Code states:
An FX swap trader needed to enter into a A dealer quoting a firm price (or
transaction where he buys/sells EURUSD. He rate), either through a voice
calls thru Reuters a foreign counterparty and broker, on an e-trading system or
asks for a firm quote. He then hits the offer directly to a potential
and confirms the deal, only realizing that he hit counterparty, is committed to deal
the wrong side. He tries to undo his at that price (or rate) in a
transaction but a more senior FX swap trader marketable amount provided the
reminded him that this is already a done deal counterparty name is acceptable.
and cannot be undone.

The FX swap trader, with the supervision of the


senior FX swap trader, decides to close the
position of the wrong transaction by doing a
sell/buy EUR against USD. They then enter
into another buy/sell EUR against USD
transaction, which was the original
requirement.
| 61
The Front Office
- Dealers and Dealing Room
Dealing Reciprocity in
the Relevant Markets
​Defined: Unwritten understandings ​The PH Model Code encourages
between dealers to quote firm two-way development of sound reciprocal dealing
dealing prices to one another; informal relationships between institutions.
understandings developed over time and
varying in scope, depth, spread, ​However, it should be clearly noted that
dependability and importance. bilateral arrangements to quote two-way
dealing prices, unless otherwise agreed in
​Understanding to quote reciprocal prices writing such as for „market makers‟ in
at certain times or at all times is a matter specific paper issues are not in anyway
for dealers of the two institutions to enforceable or binding agreements.
decide

| 62
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.
| 63
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

​Bank management must ensure


• terms are identified, documented and
agreed
• clear understanding of obligations and
limitations of liability of counterparty
accepting order
• clear policies for dealers who accept ​
and execute orders

| 64
The Front Office
- Dealers and Dealing Room
Ethical
Stop Loss Orders

​Situation/Simulation ​The PH Model Code states:


​A Derivatives Trader has an open USD IRS position where he The various types of stop-loss
pays fixed at 1.75% and receives floating. He wanted to leave an orders can have different
order to close his position just in case the market goes against
him. He calls the derivatives sales desk of Jacobs Ladder Bank conditions for triggering the order
to leave the order in which the sales person asks whether this is and varying ramifications for any
a stop-loss order or whether he is opening a position. slippage likely to be incurred or
what discretion is implied. A clear
The derivatives trader did not want to divulge his current position
but the sales person explains that their trader will support his
understanding of these conditions
position if it is a stop-loss order and will only trigger the stop loss and ramification should be reached
once the bids are actually hit. The sales person also explains between both parties before a
that there might be a slippage of about 1-2 bps. The Derivatives stop-loss order is placed and
trader of Lucas Numbers Number agrees to these conditions and
accepted.
leaves the following stop-loss order: “this is to confirm that we
leave a USD IRS order wherein Lucas Numbers receives USD
fixed of 2%, semi-annual payment, act/360 and modified
following business convention; and pays floating of 6ml, reset
semi-annually, with quarterly payments, 30/360 and modified
following business convention for USD 10million. Order is good
until NY close 15 January 2015”. Jacob Ladder Bank confirms
and agrees to the stop-loss. The slippage of 1-2bps is not
confirmed in writing but is agreed upon verbally.
| 65
The Front Office
- Dealers and Dealing Room
Position Parking

Position parking - the practice whereby


two contracting parties agree on a deal,
usually on the understanding that the
Parking Leg
contract will be reversed at a specified
Counter
Party later date, at or near the original contract
party rate, irrespective of the interim market
Return leg rate change.

‘Parking’ of deals or positions


with any counterparty is
forbidden

​Position parking can either lead to a


distorted risk position or be abused for
tax avoiding activities.
| 66
The Front Office
- Dealers and Dealing Room
Ethical
Position Parking

​Situation/Simulation ​The PH Model Code states:


​Lucas Numbers Bank closed the trading The ‘parking’ of deals or positions
day with a long USD position of USD with any counterparty should be
20MM. The FX trader realizes that he has forbidden.
breached his internal limit but still wanted
to keep his position. He then calls the FX
trader of one of their subsidiaries to
requests if he can pass on or „park‟ part
of his long position with them overnight.

​The Chief Dealer of the subsidiary did not


agree to his request as this is an
unethical practice. The FX trader of Lucas
Number was then forced to sell part of his
long position in the market.

| 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:

| 68
The Front Office
- Dealers and Dealing Room
Rate Setting

 Any information they decide to pass on


should be completely transparent and
safeguards should be in place to
ensure that there is no manipulation
of the rates.
 Financial institutions required to
publish rates should do so in a timely
and honest manner.
 They must also make the necessary
organizational arrangements to ensure
that delivery of the rates is possible on
a permanent basis without
interruption due to human or technical
failure.
 Management should ensure that
employees are fully aware of the
relevant laws and consequences
involved with rate setting.
| 69
The Front Office
- Dealers and Dealing Room
“The setting of a benchmark rate is not simply another opportunity
for banks to earn a profit. Countless individuals and companies
around the world rely on these rates to settle financial contracts, and
this reliance is premised on faith in the fundamental integrity of
these benchmarks.
“The market only works if people have confidence that the process of
setting these benchmarks is fair, not corrupted by manipulation by
some of the biggest banks in the world.”

​Aitan Goelman

​The Commodity Futures Trading Commission


​Director of Enforcement

| 70
The Front Office
- Dealers and Dealing Room
Rate Setting

Regulators slap USD4.3bn fines on six banks


in global Forex probe

| 71
The Front Office
- Dealers and Dealing Room
Rate Setting

​Situation/Simulation Transaction-based manipulation includes


but not limited to:
Beyond Anecdotal
​It has been noted that traders from some
Transactions that artificially distort prices
banks would wait for the last few seconds
or volume to give the impression of
of cut-off time to post prices for the
activity or price movement in a financial
brokers to put on screen.
instruments to induce a purchase or sale
​Such prices were deemed to skew the
of that instrument
real levels of the market.

| 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

​Situation/Simulation ​The PH Model Code states:


T​ he FX trader of Lucas Numbers is required to Financial institutions required to
publish their FX rates internally. This FX rate publish rate should do so in a
sheet is used by all branches to quote their FX timely and honest manner.
rates to their clients. The FX trader is required to
publish its rates by 9am when the market opens
and another at 2pm when the market reopens.

One afternoon, the FX trader forgot to refresh its


prices at 2pm. All the branches were still using
the rate sheet that was published at 9am. The
FX rates have moved rapidly and the FX rates
being quoted by the branches were already off-
market. Clients started complaining as they were
getting better prices from other banks. The
branch head called their FX trader to inform
them of the off-market quotes.

| 74
The Front Office
- Dealers and Dealing Room
​Dealing Through
​Brokers (Voice Brokers and

The Front Electronic Broking Platforms


 Compliance and Complaints
 Differences Between Brokers
and Principals

Office  Qualifying and Preliminary


Dealing Procedures
 Consummation of a Deal
 Commission on Broking
 Passing of Names
 Name Substitution
Compliance and
Complaints
 Compliance with The PH Model Code  If this is not possible, the institution
is necessary to ensure the highest which is subject to the complaint
standards of integrity and fair dealing should make the complainant aware
in Treasury markets and products. that it can bring the matter to the
attention of BAP- Arbitration
 Management should ensure that all Committee and bring the matter to the
complaints involving transactions are attention of the appropriate regulatory
fairly and independently investigated, body.
by employees or representatives of the
institution who were not directly
involved in the disputed transaction.
Compliance is the process that
ensures the entity is adhering
 If any principal or broking firm believes to its internal policies, and that
that an institution has breached the
its policies and procedures
letter or spirit of The PH Model Code in
respect of any transaction in which it establish to comply with
is involved, it should seek to resolve applicable laws and
and settle the issue quickly and fairly, regulations, are performing as
with high degree of integrity and
intended.
mutual respect.
| 76
The Front Office
- Dealing Through Brokers
Differences between
Brokers and Principals
 Voice brokers should ensure that any  All compensation should take the form
prices they quote are substantiated of a bank transfer payment in the
with a valid order. name of the institution or adjustment
to brokerage bills.
 If the broker fails to conclude the
transaction at the quoted price and  All such transactions should be fully
has to accept a lesser quote to documented by both the principal and
neutralize the risk, senior the voice broker. It is considered bad
management should be informed and practice to refuse a broker‟s
a dialogue between the parties should compensation for the amount
ensue, such that they reach a viable concerned and to insist on a name at
solution. the original price.

| 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.

​After discussing with both management teams the


dispute, both agreed to meet half way and the traded
price was at 101.

| 78
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.
| 79
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.

| 80
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.

| 81
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 +
| 82
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

Qualifying Amount from the Quoting Bank Preliminary Negotiation


# Hi, Spot USD/JPY for USD 10 plse?
> 119.40 – 43 for USD 5 only plse +
State qualifying condition at quote, not after action by Calling
Bank
| 83
The Front Office
- Dealing Through Brokers
Qualifying and Preliminary
Dealing Procedure
Typed Dealing Conversation:
Qualifying Conditions

Qualifying Amount from the Calling Bank (Terms Currency Amount)


# Hi, Spot USD/JPY for JPY 1 Yard plse? Preliminary Negotiation
> 119.40 – 43 +

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.
| 84
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

| 87
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.

| 88
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.
| 89
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.
| 90
The Front Office
- Dealing Through Brokers
Commission in Broking

The PH Model Code:


 Allows for negotiation of commission
or brokerage

 Enlists that negotiation by those with


appropriate authority

Commission  Mandates maintenance of written


agreement and subsequent changes

 Encourages prompt payment of


brokerage billing

 Specifies that dealing prices should be


exclusive of commissions/brokerage

| 91
The Front Office
- Dealing Through Brokers
Ethical
Commission in Broking

​Situation/Simulation ​The PH Model Code states:


​ Bond trader needs to buy an illiquid
A Any deviation from previously
USD corporate bond, Bond ABC, for his agreed brokerage arrangements
HTM portfolio due to its high yield. He should be expressly approved by
leaves a buy order with his broker to buy both parties and clearly recorded
USD 20MM of Bond ABC. The broker in writing.
agrees to take his order but tells the bond
trader that the brokers fee will be slightly
higher if the order is filled because of the
bond‟s illiquidity, in which the bond trader
was willing to accept.

​The broker was able to fill the bond


trader‟s offer and they confirm thru
Bloomberg the details of the trade,
including the higher brokers fee.

| 92
The Front Office
- Dealing Through Brokers
Passing of Names

 The bank whose name has been


refused in a potential transaction may
approach the BSP or a neutral body,
e.g. the BAP, to substantiate with the
refusing bank the reasons why the
deal was refused
 Name of borrower in a money market
transaction should not be disclosed
until broker has ascertained that
potential lenders seriously intend to
deal
 When a lender asks: “Who pays?”, it is
considered committed to do business
Names of potential bank at the price quoted with the name or
counterparties should not be disclosed with an alternative acceptable name;
broker should reveal only one name at
prematurely by brokers until both
a time
counterparties have expressed serious  Lender‟s name should only be
intention to deal disclosed only after the deal is closed
| 93
The Front Office
- Dealing Through Brokers
Unethical
Passing of Names

​Situation/Simulation ​The PH Model Code states:


​A Bond trader of Lucas Numbers Bank needs Brokers should not divulge the
to buy an ROP bond and requests for a quote names of principals prematurely,
from his broker. The broker gives a quote of and certainly not until satisfied
101.00-101.50 and the bond trader lifts the that both sides display a serious
offer. The broker confirms that the trade was intention to transact.
done and that his counterparty is Jacobs
Ladder Bank. When the broker lifts the offer
of the Jacobs Ladder Bank, the Bond trader
informs him that his offer was just lifted and
his offer is now 102.00.

T​ he broker has to inform the Bond trader of


Lucas Number Bank that the trade was not
done with Jacobs Ladder Bank and that he will
look for another counterparty whose offer
price is still at 101.50. The broker was able to
find another counterparty and confirms this
deal with Lucas Numbers Bank.
| 94
The Front Office
- Dealing Through Brokers
Name Substitution

​It is acceptable for Brokers to substitute a


third name to stand between two original
counterparties to complete a deal
because one counterparty‟s credit limit is
full.
​Switch transactions utilize credit and
often executed at rate that is off-market
due to time taken to arrange for third
party intermediary
​Switches should be closely monitored and
controlled:
 Dealers of switching bank should have
bank senior management approval
 Must be carried out on the day of
Substitution takes place when the brokers transaction
attempt a third name to stand between the  Dealer must not seek or accept favors
two original counterparties from broker for switching names
 Lender‟s name should only be
disclosed only after the deal is closed
| 95
The Front Office
- Dealing Through Brokers
Ethical
Name Substitution

​Situation/Simulation ​The PH Model Code states:


​The FX trader of Lucas Numbers Bank The practice of name switching/
needs to buy USDPHP and gets a quote from substitution is accepted and
his broker. He then lifts the offer and asks desirable if they are monitored and
for his counterparty‟s name. The broker controlled.
tells him that his counterparty is Jacobs
Ladder Bank. The FX trader of Lucas
Numbers Bank then checks his credit lines
and his credit limits are currently full for
Jacobs Ladder Bank.

​The FX trader of Lucas Number Bank


requests his broker to switch names for his
counterparty due to his credit limits. The
broker then agrees and looks for viable
counterparties for both Lucas Number and
Jacobs Ladder Bank. The broker internally
documents this name switch and the reason
for the substitution.
| 96
The Front Office
- Dealing Through Brokers
Post-trade
Standards
and  Confirmation of Trades
 Netting
 Settlements

Practices
Post-trade Standards
and Practices

| 98
Post-trade Standards
And Practices
Confirmation of Trades

 Essential risk control available to firms


dealing in financial markets is the
independent confirmation of details of
a transaction between back offices of
the counterparties

 Failure to ensure confirmations are


sent, or interception of confirmations
by dealers have contributed to most
notorious incidents of deception by
rogue dealers
All First Bank Trader faked FX confirmation  Brokers should confirm all
tickets to hide positions…. Found in his transactions to both parties
computer saved us “fakedoc.doc” immediately by an efficient and secure
means of communication

| 99
Post-trade Standards
And Practices
Confirmation of Trades

​Practice of intra-day oral checks is


strongly recommended for transactions
negotiated and settled bilaterally as
important means to reduce number and
size of differences particularly
 When dealing with brokers

 For deals involving foreign


counterparties

 For fast moving markets like foreign


exchange or
All First Bank Trader (US) selected foreign  Instruments that have very short
counterparties (Asia) for his fake FX settlement periods
confirmations…. “pressured back office ​Where discrepancy involves dispute
personnel into not doing confirmations resulting in open risk position for either
because counterparts were in other side counterparty, position should be
immediately closed out in market without
of the world”
inference that either party is wrong
pending resolution of dispute | 100
Post-trade Standards
And Practices
Confirmation of Trades

​Automatic Trading Systems introduced an


alternative means to implement
independent cross-checking of
transactions; applicable standards are:
 ATS (or CCP) is independent of
counterparties

 Settlement matching occurs without


undue delay after transaction
execution

 Communications with ATS are efficient


secure and robust

 Counterparties have efficient


procedures in place to resolve

| 101
Post-trade Standards
And Practices
Netting

 Bank for International Settlements  Market institutions should, where


(BIS) together with major central activity justifies, aim to reduce
banks exerted considerable pressure settlement and related credit risk on
on market banks to avail where currency transactions by
possible of bilateral and multilateral o Establishing legally viable bilateral
payment netting arrangements currency payment and transaction
 Continuous Link Settlement (CLS) netting agreements with
enables cross-border currency counterparties, or
transactions to be settled intra-day, o Considering the significant risk
real-time. reductions possibilities offered by
o CLS Bank and CLS Services operate global settlement systems such as
global settlement system CLS
o CLS Bank virtually eliminates
settlement risk in FX related
transactions eligible CLS Bank
operational rules by matching two
party‟s payment instructions and
applying a payment versus payment
system
| 102
Post-trade Standards
And Practices
Settlements

​Payment and settlement instructions


should be passed as soon as possible to
facilitate prompt settlement
Use of Standardized Settlement Instructions
​Where beneficiary of a transaction is a
(SSI) strongly recommended Third Party, management has
responsibility to ensure appropriate
authentication controls are in place for
payment to be executed

| 103
Post-trade Standards
And Practices
Security  Fraud
 Money Laundering and Terrorist
Finance
Fraud

​Strong administrative controls are


recommended to prevent occurrence of
fraud
Special vigilance on:
 Phone calls received on ordinary
telephone in principal-to-principal
transactions.
 Control: Details of all phone deals
which do not have pre-agreed
standard settlement instructions to be
confirmed by means by recipient
seeking answer-back to ensure deal is
genuine

 Deals where beneficiary is a third


party or other than transaction
counterparty
 Control : Recheck authenticity of deal
and particular care should be taken
when paying fund to a third party | 105
General Security
Money Laundering and
Terrorist Finance
​Banks and their employees have a duty to
prevent money laundering and terrorist
financing
Placement
Money laundering involves three basic
steps
1. Introducing illegal proceeds, often in
Layering
form of cash, into financial system
2. Separating proceeds of illegal activity
from origins through layers of complex
financial transactions
Integration 3. Providing an apparently legitimate
explanation for the illicit proceeds

​Terrorist financing involves money being


moved via banks in reverse direction, i.e.
from legitimate sources to terrorists

| 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

Regular review of policies and


procedures, audit systems and controls to
keep pace with rapidly changing methods
of money laundering and terrorist
financing
​Monitor continually evolving law,
regulation and best practice on
prevention and detection of these crimes

​Terrorist financing involves money being


moved via banks in reverse direction, i.e.
| 107
from legitimate sources toGeneral
terrorists
Security
Money Laundering and
Terrorist Finance
Special attention on unusual o With counterparties or
transactions, which are intermediaries in countries that do
o Complex, particularly where there not accept or enforce Financial
is no apparent reason for this Action Task Force (FATF)
complexity recommendations
o Lacking an obvious business o With Politically Exposed Persons
rationale (as defined by FATF)
o Inconsistent with a customer‟s o Making extensive use of offshore
established pattern of business accounts, companies or structures
o Unusual in frequency or amount, with no apparent business reason
where no reasonable explanation o Unnecessarily routed through third
has been offered party accounts
o Of a type not normally used by the o With undisclosed principals
customer and no reasonable o Dealt anonymously over-the-
explanation has been offered counter (OTC)
o With counterparties or o Where it is unclear who is the
intermediaries who provide beneficial owner of the assets
insufficient or suspicious o Where agents and principals are
information; try to avoid reporting connected
or record keeping requirements
| 108
General Security
Money Laundering and
Terrorist Finance
​Key protection is application of traditional
principle of “KNOW YOUR CUSTOMER”
(KYC). “KYC” also describes sets of
monitoring procedures and systems put in
place to detect suspicious transactions

Uncompromising Stance of ACI-FMA and


its CFP
​Strongly support any attempt by
legislators, regulators, industry
association and individual banks to
eradicate money laundering, terrorist
financing and other criminal activities
from the marketplace

| 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.

​Market participants impose form of self- • Participants should implement and


regulation by holding themselves bound enforce both The Model Code for
to The Model Code which may form an trading and the rules and procedures
integral part of a financial institution‟s of one‟s own institution.
policies and procedures documented by
the Risk Management Group • The highest ethical standards should
be maintained at all times.

| 110
General Security
Standard Amounts

​USD/PHP FX transactions USD 1,000,000

​USD/Thirds FX transactions USD 1,000,000

​Foreign Currency Loans & Deposits USD 1,000,000

​Local Currency Loans & Deposits PHP 10,000,000

​Phil. Gov‟t. Securities PHP 50,000,000

| 111
excursus |ɪkˈskəːsəs
Key Market
Terminology
Key Dealing Terminology

​Strong emphasis is placed on the conduct


and practice that must prevail in the
critical area of quotation of dealing rates
and the agreement of trades. This priority
is further underlined by the inclusion of
market terminology which forms an
integral part of The PH Model Code. All
dealers and candidates for examinations
Internal procedures should be present which should be fully conversant with this
ensure that dealers and brokers are fully section.
​When market jargon is used to agree to a
aware of any differences in terminology
transaction, the parties should be 100%
among different markets - especially when a sure that they are referring to the same
dealer is dealing in a particular market for set of terms. This will also reduce
the first time disputes when such terms are set out in
writing, in a confirmation.
The vast majority of disputes arise from
failure of dealers to use clear, unambiguous
terminology
| 114
Key Market Terminology
Dealing Terminology
Terminology Definition

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
| 115
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

Done Acknowledgement that a deal has been concluded

Either way Quoted BID and OFFER price is the same; same as Choice

FX Swap Simultaneous spot purchase/sale of a currency combined with a


reversing sale/purchase at a different later date
Firm, Firm price Rate quoted is valid and can be traded on

For indication, Indicative quotation only and should be validated/confirmed before


For information trades are proposed
Forward FX FX transactions with value date beyond spot, e.g., 3-mo. Forward

| 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

Given Bid price has been dealt

Join Commitment to put an additional bid or offer at a current bid or offer


price already quoted by the broker
Lac or (Lakh) One hundred thousand, i.e., 100,000.00

Long FX Risk Position wherein total Foreign currency purchases exceed


(Overbought) total Foreign currency sales; total includes balance sheet items and
contingent items such as value Tom, value Spot and forward FX
contracts

| 117
Key Market Terminology
Dealing Terminology
Terminology Definition

Mine, I Buy Proposal to deal:


 Spot and Forward: the rate at which the Price taker buys the
Commodity (Base) currency
 FX Swap: the rate at which the Price taker sells Spot and buys
Forward the Commodity (Base) currency
 Money Market: the rate at which the Price taker borrows funds

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

Off Cancellation or withdrawal of existing Bids or Offers

Open Position Difference between Foreign currency purchases and Foreign


currency sales, including unliquidated contracts
| 118
Key Market Terminology
Dealing Terminology
Terminology Definition

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”
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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
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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 Today Settlement Date on the same day as Trade Date

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

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Key Market Terminology
Dealing Terminology
Terminology Definition

Yard One billion or a thousand million, i.e., JPY 1,000,000,000

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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.

Front-running Arises where an employee executes a personal trade in advance of a


client‟s or institutional order to benefit from an anticipated
movement in the market price following the execution of a large
trade.
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Key Market Terminology
Miscellaneous
Terminology
Terminology Definition
Insider trading Dealing in financial instruments based on confidential information
about the issuer of such instruments or the instruments. Insider
dealing is a criminal offence in many countries.

Master A Master Agreement (or master contract) is a contract reached


Agreement between parties, in which the parties agree to the terms that will
govern future transactions or future agreements.
Name Where brokers will attempt to substitute a third name to stand
switching/subst between the two original counterparties to clear the transaction.
itution
Netting Documentation to support settlement with counterparties on a net
agreement payment basis. Market institutions should aim to reduce the
settlement and related credit risk on currency transactions by
establishing legally

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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.

Odd/broken/co Dates other than the regular dates outlined above.


ck dates
Regular One week, one month, two months, three months, six months, nine
dates/periods, months and one year usually from spot or occasionally from today in
Fixed domestic money markets
dates/Periods
Short dates Maturity dates of less than one month.
Standard Agreement between two financial institutions which defines the
Settlement receiving agent bank details for the settlement of trades for a
Instructions specific currency; utilizing SSI may also lower the potential for fraud.
(SSI) | 126
Key Market Terminology
Miscellaneous
Terminology
Terminology Definition
Spot Generally, two banking days from „today‟; exceptions can include the
Canadian Dollar (CAD) and the Hong Kong Dollar (HKD)
Third party Recipient of the payment different to the counterparty of the
beneficiary relevant trade

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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

A separate system for independent


monitoring to ensure compliance with the
risk management framework should be in
place.

​There must be complete segregation of


duties between the front, middle and
back office activities.

​Regular internal audits, independent of


trading and risk management functions,
should be carried out to ensure early
identification of internal control
weaknesses.

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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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