FEDERAL RESERVE BANK OF NEW YORK
August 1, 1990
To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District:
The Board of Governors of the Federal Reserve System, in conjunction with other Federal bank regulatory agencies, has issued the following statement prohibiting the use of "points" by banks in their foreign exchange operations and requiring the adoption of alternative procedures regarding disputed contracts:
A practice unique to the brokered foreign exchange market is the use of "points" as a way to settle disputed contracts. "Points" are used in the bokered foreign exchange market as a means of dealing with problems arising from missed prices from miscommunications, and/or from broker and dealer errors. The use of "points" permits a dispute brokered transaction to be completed, but defers settlement of the difference arising from it (measured in"points") until these "points" are settled by - depending on the circumstances - arranging proportionately advantageous or disadvantageous future traders and brokers, they are not normally included in the financial records of the institution on whose behalf the foreign exchange contract was completed and are often accomplished without formal management acknowledgment.
Ineffective policies, procedures and controls over disputed contracts by a financial institution can result in inaccurate records, misleading reports filed with regulatory and tax authorities, misapplication of funds, and potential violations of the institutions internal policies and Federal criminal laws regarding gifts to bank personnel. The U.S. bank regulatory agencies have found that the use of "points" is a practice that can lead to significant abuse and is considered an unsafe and unsound banking practice. Accordingly, each U.S. commercial bank. Edge or Agreement corporation, and branch, agency and commercial lending company associated with a foreign bank and subject to U.S. Federal bank regulatory agencies supervisory jurisdiction that deals in foreign exchange must develop, adopt, and implement detailed policies and procedures regarding disputed trades and should prohibit the use of points. Adequate procedures should be developed that identify and control risk, and at a minimum should detail proper accounting, management, and financial controls over disputed contracts. The policy statement should be approved by senior management and reviewed by the board of directors in the case of a bank, or the parent institution in the case of an office of a foreign bank or Edge corporation.
Questions regarding this matter may be directed to our International Banking Department (Tel. No. (212) 720-7934
Frederick C. Schadrack,
Executive Vice President
