Foreign Exchange Operations Master Trading Agreements, Settlement, and Collateral

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2013-10-28
  • Publisher: Wiley

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The ultimate nuts-and-bolts guide to foreign exchange operations

The foreign exchange landscape is particularly risky since so much of the world is unregulated and takes place over the counter (off exchange). Brilliant traders and money managers who are profitable may find themselves underperforming, or worse, losing, simply because they failed to establish strong operations. In this book, David DeRosa provides industry players with everything they need for strong operational functions from all the types of trades to execution, master trading agreements, documentation, settlement, margin and collateral, and prime brokerage services.

  • Contains vital work flow solutions for trading in the volatile foreign exchange marketplace
  • Offers information for mastering the operational aspect of foreign exchange trading to help determine best partners such as prime brokers and others
  • Written by David DeRosa a leading foreign exchange expert who has consulted to hundreds of financial institutions

Foreign Exchange Operations helps traders mitigate risks and offers a guide to all aspects of trading operations from mastering trading agreements to margin documentation.

Author Biography

David F. DeRosa is President of DeRosa Research and Trading, Inc., a firm that conducts research into derivatives pricing, macroeconomics, monetary policy, and foreign exchange. He is an adjunct associate professor of finance at the Fu Foundation School of Engineering and Applied Science at Columbia University where he teaches courses in pricing models in financial engineering. David sits on the boards of several prominent hedge fund groups. He is the author of many books including Options on Foreign Exchange (Wiley), Central Banking and Monetary Policy in Emerging-Markets Nations, and In Defense of Free Capital Markets. David received his PhD in finance and economics from the Graduate School of Business of The University of Chicago, and his BA in economics from the College of The University of Chicago. Before founding DeRosa Research, he worked on Wall Street as a foreign exchange trader, hedge fund trader, and portfolio manager.

Table of Contents



About the Author

Chapter 1 Introduction to Foreign Exchange

Defining “Money”

Participants in the Foreign Exchange Market

Indentifying Currencies and Exchange Rates

Quotation Conventions

The Foreign Exchange Market

Foreign Exchange Regimes

Exchange Rate Controls

The Structure of the Foreign Exchange Market

Banks Identifications Codes

The Authorities

Spot Foreign Exchange Deals

Profit and Loss on a Simple Trade

Value Dates

Forward Foreign Exchange Deals

Covered Interest Parity And Forward Foreign-Exchange

Forward Swaps

Non-Deliverable Forwards


Appendix 1.1: ISO Currency Codes

Appendix 1.2: Historical ISO Currency Codes


Chapter 2 Options on Foreign Exchange
Vanilla and Exotic Currency Options

Option Basics

Put-Call Parity

The Importance of Option Models

Risk Parameters

The Minor Greeks

More on Delta

Portfolios of Options

American Exercise Models


Important Option Strategies

Option Market Making

Non-Deliverable Options

Barrier Options

Binary Options

Barrier Determination Agency

Other Exotic Options

More on Option-Related Risks



Appendix 2.1: Further Comments on Put-call Parity

Appendix 2.2: Black-Scholes-Merton Model

Appendix 2.3: Barrier and Binary Options

Chapter 3 How Trades are Executed and Confirmed

Spot Foreign Exchange Deals

Forward Outright Deals

Forward Swap Deals

Option Trades

How Foreign Exchange Trades Are Executed

Concentration in Market Making

An Example of an Electronic Trading Platform: FXall

The Trade Documentation Cycle

Internal Operations and Reports for Dealers



Chapter 4 Foreign Exchange Settlement

Settlement Instructions for an Individual Spot Foreign Exchange Deal

Overview of the Settlement Process

The Bretton-Woods and Smithsonian Systems

The Herstatt Legacy

Settlement Risk


How the Modern Settlement Systems Developed

Large-Value Transfers

Central Bank Involvement

Correspondent Banking

Payment Systems

Designated-Time Net Settlement (DTNS)

Real-Time Gross Settlement (RTGS)

Examples of Modern Payment Systems

The Continuous Linked Settlement Bank

Internal Controls



Chapter 5 Master Agreements


The Architecture

The FXC and ISDA Master Agreement Forms

Single Agreement

Non-Reliance: Parties to Rely on their Own Expertise

Netting: Payment or Settlement Netting and Novation Netting

Events of Default

Termination Events

Additional Termination Events

Close-Out Netting

Safe Harbors

Early Termination

Payments Upon Termination and Close-Out Amounts

Close-Out Amount: ISDA 2002

Set-Off Provisions

Special Features for Options: ICOM and FEOMA

Special Features for Non-Deliverable Forwards

More on Deeds of Adherence and Schedules



Appendix 5.1: IFXCO Terms

Chapter 6 Margin and Collateral: Financing Foreign Exchange Trading

Credit Agreements

The Framework for the ISDA Credit Support Deed and the FXC Collateral Annex

The Framework for the ISDA Credit Support Annexes

Enforcement Rights of the Secured Party

Some Additional Features Commonly Found in Credit Support Documents

The Value-at-Risk Concept

VaR for Spot, Forward, and Vanilla Options

Portfolio Value-at-Risk

Sample Customer Credit Snapshot

Limitation of VaR

Limitations of Collateralized Agreements



Appendix 6.1: The 1999 Collateral Annex to FEOMA, IFEMA or ICOM Master Agreement

Chapter 7 Foreign Exchange Prime Brokerage

Overview of FX Prime Brokerage

Pros and Cons of FX Prime Brokerage

Execution and Confirmation in a FX Prime Brokerage Environment

The Legal Architecture of FX Prime Brokerage

The FX Prime Broker and the Executing Dealers

The Master FX Give-Up Agreement

The FX Prime Broker and the Designated Party

The Executing Dealer and the Designated Party

Reverse Give-Up Relationships



Appendix 7.1: Master FX Give-up Agreement

Appendix 7.2: Compensation Agreement


Rewards Program

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