Forex management

1. Banking Technology
Forex Management

2. Banking Technology – M.Tech (IT)
Agenda
Foreign Exchange Market
The Basics
Two-Tiers of the Market
Role of Commercial Banks
Structure & Interfaces of FX Deal
FX Transaction Summary
Role of SWIFT

3. Banking Technology – M.Tech (IT)
Foreign Exchange
• Forex or FX market is the world’s largest
financial market!
• It is much bigger than all of the U.S., Tokyo
& London stock markets combined, with a
daily trading volume larger than that of all
the world's stock markets put together.
• Trillions of dollars of foreign exchange
activity takes place every day. From 1997
to the end of 2000, daily forex trading
volume surged from US$5 billion to
US$1.5 trillion.

4. Banking Technology – M.Tech (IT)
The Basics
Foreign exchange: currency and bank deposits that are
denominated in foreign money; foreign money like
currency or bank deposits
Foreign exchange market: a global market where
currencies are traded
• Facilitates trade with exchange of currencies
• Developed over long period of time
– gold standard, 1876-1913
– pegged rates in 1930s
– fixed exchange rates 1944-1973
– market determined exchange rates 1973-present

5. Banking Technology – M.Tech (IT)
The Influence Factors
• The factors affecting foreign exchange interest
rates:
– supply and demand for money
– inflation rate
– government intervention.
• Economic factors affecting foreign exchange rates
are:
– relative interest rates
– purchasing power parity
– economic conditions
– supply and demand for capital

6. Banking Technology – M.Tech (IT)
Motives for using International
Financial Markets
• Investing in foreign markets
• Providing credit in foreign markets
• Borrowing in foreign markets

7. Banking Technology – M.Tech (IT)
2-Tiers of the Market
• Retail Tier - where the small agents buy and
sell foreign exchange
• Wholesale Tier - an informal network of
banks and currency brokerage firms that
deal with each other and with large
corporations.
– When the financial press talks about the foreign
exchange market in general it refers to the
wholesale tier.

8. Banking Technology – M.Tech (IT)
The Instruments
• Spot
• Outright Forwards
• Forex Swaps
• Currency Swaps
• OTC FX Currency Options
• Exchange Traded Futures
• Exchange Traded Currency Options

9. Banking Technology – M.Tech (IT)
FX & Commercial Banks
– Commercial banks account for the largest
proportion of total trading volume.
– About three quarters of all foreign exchange
trading is between banks.
– These transactions are called interbank or direct
dealing transactions.
– Direct dealing saves the commission charged
by brokers.

10. Banking Technology – M.Tech (IT)
Foreign Exchange Market: Role
of Banks
• No specific trading market
• Spot rate
– immediate exchanges made at banks
– volume of exchange linked to international trade and
finance
– six currencies comprise 90% of US exchange volume
– Japanese yen, German mark, British pound
– Canadian dollar, French franc, Swiss franc
– US banks’ opening exchange rates use prevailing rates of
London banks
What about India??

11. Banking Technology – M.Tech (IT)
Role of SWIFT
• The primary clearing system for international
transactions is operated by SWIFT (Society for
Worldwide Interbank Financial
Telecommunication).
• The electronic transfer system works in a very
simple way:
– two banks involved in a foreign currency
transaction will simply transfer bank deposits
through SWIFT to settle a transaction.

12. Banking Technology – M.Tech (IT)
Swift Operating
Center of the Bank
Forex Branch –1 Forex Branch –n Forex Branch –1 Forex Branch – n
SWIFT
International Network
Payment
gateway
Payment
gateway
Overseas
Bank Branch

13. Banking Technology – M.Tech (IT)
MT 300 Foreign Exchange Confirmation
· MT 303 Forex/Currency Option Allocation Instruction
· MT 304 Advice/Instruction of a Third Party Deal
· MT 305 Foreign Currency Option Confirmation
· MT 306 Foreign Currency Option Confirmation
· MT 307 Advice/Instruction of a Third Party FX Deal
· MT 308 Instruction for Gross/Net Settlement of Third Party FX
Deals
· MT 320 Fixed Loan/Deposit Confirmation
· MT 321 Instruction to Settle a Third Party Loan/Deposit
· MT 330 Call/Notice Loan/Deposit Confirmation
· MT 340 Forward Rate Agreement Confirmation
· MT 341 Forward Rate Agreement Settlement Confirmation
· MT 350 Advice of loan/deposit interest payment
SWIFT Message & Formats

14. Banking Technology – M.Tech (IT)
SWIFT Message Layout

15. Banking Technology – M.Tech (IT)
Money
Market
Treasury
ManagerCorporate
Spot
Forwards
Derivatives
Foreign Exchange
Money Markets
Structure and Interfaces of an FX
Deal

16. Banking Technology – M.Tech (IT)
CounterpartyCounterparty
BrokerBroker
Dealers
Deal entry
Position update
Trading profits
Dealers
Deal entry
Position update
Trading profits
Settlements
Contract check
Complete/check deal
Send confirmation
In currency ledger
In customer journal
Pay any brokerage
Value Date – 2
Check liquidity
Send payment instruction
Value Date
Out currency ledger
Out customer journal
Value Date +2
Reconcile nostro account
Settlements
Contract check
Complete/check deal
Send confirmation
In currency ledger
In customer journal
Pay any brokerage
Value Date – 2
Check liquidity
Send payment instruction
Value Date
Out currency ledger
Out customer journal
Value Date +2
Reconcile nostro account
Accounts/Audit
Copy of contract
Prepare profit and loss in
contingent A/Cs
Update balance sheet
Report to central bank
Out contingent A/Cs in due
from/to Banks balance
sheet Out
Audit check
Accounts/Audit
Copy of contract
Prepare profit and loss in
contingent A/Cs
Update balance sheet
Report to central bank
Out contingent A/Cs in due
from/to Banks balance
sheet Out
Audit check
FX Transaction
Summary

17. Banking Technology – M.Tech (IT)
Technology & FX
3 electronic systems in wide use:
• Direct dealing systems - used in OTC markets.
– Dealers contact each other to transact without a broker
• Automated matching systems - electronic brokers,
which offer anonymous trading.
– Used when traders are seeking the best prices in the
market and they are not particularly bothered with whom
they trade
• Support systems used by direct dealing and
automated matching systems

18. Banking Technology – M.Tech (IT)
E-Trading Architecture

19. Banking Technology – M.Tech (IT)
OBJECTIVES BEHIND FOREX
MANAGEMENT
 COST REDUCTION
 CONTAIN LOSSES
 OPTIMISING EXCHANGE GAIN
 PROTECT OPERATING PROFIT
 ACHIEVE BUDGETS AND TARGETS
 INSURE AGAINST ADVERSE
EXCHANGE RATE MOVEMENTS

20. Banking Technology – M.Tech (IT)
HOW TO ACHIEVE THESE
OBJECTIVES?
 Determine the nature of exposure
 Evaluate the risks and rewards
 Decide targets & strategies to safeguard against
currency risk
 Formulate policies for day-to-day operations
 Strong MIS Reporting system
 Periodical review of performance & strategy

21. Banking Technology – M.Tech (IT)