December 22, 1993
Re: Trade Confirmation and Dispute Resolution Practices
Dear Sir/Madam:
The Foreign Exchange Committee's Guidelines for the Management of Foreign Exchange Trading Activity (revised March 1992) are intended to enhance the integrity of the foreign exchange market through the promotion of sound business practices. As part of our continuing efforts in this regard the Committee is issuing a set of recommended management principle to serve as an elaboration of the existing guidelines for the purpose of improving trade confirmation and dispute resolution practices it is the Committee's hope that the adoption of written procedures by dealing institutions consistent with these recommended principles will (1) improve confirmation practices within the dealing community, (2) clarify duties and good practices, thereby helping trading room management to avoid disputes, and (3) facilitate dispute resolution by providing disputants a standard against which counterparty conduct can be evaluated.
The Committee's recommended guidelines stem from the understanding that all foreign exchange market participants have certain duties. Perhaps the most fundamental of these in relation to trade confirmation and dispute resolution practices is the duty to maintain an efficient operating staff or "back office." Management's attention to a foreign exchange trading operation is usually directed toward establishing trading policies, managing risk, and developing trading personnel. Equally important, however, is a rigorous back office. Details of each trading transaction must be accurately recorded, payment instructions must be correctly exchanged and executed, account must be quickly reconciled and financial results must be properly evaluated. Time-consuming and costly reconciliation of improperly executed or disputed transactions mar the efficiency of the market, undermine profitability, and can impair the willingness of others to trade with an offending institution. Accordingly, management must be aware of its responsibility to establish a back office consistent with the scope of its trading activity.
The Foreign Exchange Committee has identified four specific duties that follow from the fundamental duty of market participants to maintain a rigorous back office. These duties, along with the Committee's existing recommendations in its Guidelines (the relevant portions of which are attached hereto), represent the basis for the procedures we are recommending regarding the internal management of trade confirmation and dispute resolution practices by foreign exchange dealing institution and brokers.
- Same-Day Confirmation:
Institution active in the foreign exchange markets should exchange same-day confirmation of all foreign exchange transactions to which they are party - including both interbank and corporate, spot and forward. The prompt exchange of confirmations and their immediate and thorough checking upon receipt is vital to the orderly functioning of the market place and provides a first defense against fraud. If there has been a misunderstanding between counterparties regarding transaction terms, it will usually be discovered upon the review of the confirmation. Counterparties to a brokered transaction should exchange confirmations, including for spot transactions, even though the parties may have received confirmations from the broker.
Any use of same-day telephone confirmations should be followed by written confirmation (i.e. hardcopy) exchanged by means of immediate communication, on the transaction date. Such timely confirmations can be exchanged via telex, SWIFT, facsimile, or by various automated dealing and confirmation systems. These forms of immediate communication are superior to mailed confirmations which, particularly in the case of spot transactions, often do not arrive in time to bring problems to light before the settlement date. Institutions should make an effort to automate the confirmation process, since unautomated confirming systems tend to break down during periods of heavy activity, times when reliable confirmations are most important.
Confirmations should identify (I) the parties to the foreign exchange transaction and the designated offices through which they are respectively acting, (ii) the broker, if applicable, (iii the transaction date, (iv) the amount of the currencies being bought or sold and by which parties. (v) the exchange rate at which the currency amounts are being bought or sold, and (vi) the value date. The non-receipt of expected confirmations or any inconsistencies or inaccuracies in confirmations should be queried or objected to within the time period recognized by local market practice or, at most, within three business days of the transaction date.
- The Making and Storing of Tapes:
It is now standard market practice among trading institutions to tape record all telephone lines used for striking and confirming foreign exchange trades. Such recordings are generally the best evidence of the essential terms of a trade as agreed to by the parties. As such, tape recordings of traders phone conversation and back office oral confirmations can substantially reduce the number of disputes that arise between market participants, as well as the time required to resolve such disputes.
Tapes of recorded trades and confirmations should be kept in secure storage for as long as is sufficient for most disputes to surface. While the preference of individual institutions may differ, the Committee recommends a minimum storage period of two months for recorded trades and six months for recorded confirmations.
- Responding to Reasonable Requests for Confirmation:
Resources and procedures should be maintained to respond to requests for confirmations of existing trades Management should ensure that meeting such requests is regarded by back office staff as a standard part of the overall confirmation process and that such requests are met on a timely basis.
- Mitigating Loss and Resolve Disputes:
In the event of a transaction dispute, instructions active in the foreign exchange market have the duty to mitigate their respective losses and to act in good faith to promptly resolve the dispute, even if an institution believes it has not contributed to the error. Any losses arising from such disputes should be allocated between the counterparties according to a weighing of each couterparty's acts, omissions or errors that contributed to the loss.
Any evaluation of the conduct of the two counterparties should focus on both the original trade and the confirmation process. Counterparties who may have misconstrued the terms of the original trade, but were diligent in the confirmation process should not be held entirely responsible for the subsequent loss. Conversely, counterparties who were blameless in the striking of the original trade, but who were then negligent in the confirmation process must somehow share in any subsequent loss. An evaluation of counterparty conduct should consider all relevant confirmation opportunities -- including, but not limited to the original trade, the phone confirmation, the same-day written confirmation and the check out process.
Example of acts, omissions or errors that might contribute to a loss would include the misconstruing by one party of the terms of the original trade, the failure of a party in a subsequent telephone or written confirmation to state the correct terms of the transaction, or the failure of the other party to recognize the error of the first party. Failure to cooperate in the identification and resolution of disputes could worsen losses, which may then become largely the responsibility of the negligent counterparty.
Attached is a copy of the Committee's Document of Organization and a list of its 1993 Membership. Please feel free to contact myself, members of the Committee, or the Committee's Executive Assistant with any questions or comments regarding this letter.
Very truly yours,
Lewis W. (Woody) Teel
Chairman
