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Committee Letter Endorsing the EMI's Recommendation on EMU Business Holidays

March 3, 1998

Dear Foreign Exchange Professional:

Over recent months, major European market associations and wholesale payment and settlement organizations have been active in encouraging work directed at standardizing market conventions in order to facilitate trading in the euro. The issue of the timing of cash settlements, complicated by the numerous banking holidays observed within the participating economies, was highlighted in the Bank of England publication, Practical Issues Arising from the Introduction of the Euro, Issue No. 5, August 7, 1997. Public holidays in the European Union Member States collectively sum to about 50 days each year.

The European Monetary Institute (EMI) has recommended that TARGET Interlinking be open on all weekdays when more than one national settlement system is open. With clearing of the euro possible on all weekdays but Christmas and New Year's, the determination of value dates becomes clear.

Counter parties have the option to negotiate value dates for individual trades, and hence observe a national holiday. However, the standard payment date for euro transactions would be when TARGET Interlinking is open. If a specific domestic market is closed, arrangements would be made to settle in another European center that is open.

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

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

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

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

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

Sincerely,
  
John J. Finigan, Jr.
Chairman