Dealing room operations

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Dealing room operations

  1. 1. Dealing Room Operations
  2. 2. FX Dealing Room Operations <ul><li>Service Branch – customers buy or sell FX, fund nostro A/c and also proprietary trading in currencies </li></ul><ul><li>Dealer </li></ul><ul><li>Understanding of the job </li></ul><ul><li>Risk Trading capacity </li></ul><ul><li>Speed in decision making </li></ul><ul><li>Quick reflexes </li></ul><ul><li>Understanding market changing </li></ul><ul><li>Psychological Qualities – ability to work under stress, willingness to accept responsibility, good measure of aggressiveness, willingness to recognize that one can be wrong </li></ul>
  3. 3. <ul><li>Dealer to maintain two position - funds and currency (no mismatches). </li></ul><ul><li>Position Book </li></ul><ul><ul><li>Currency – merchant interbank </li></ul></ul><ul><ul><li>Overbought / Long </li></ul></ul><ul><ul><ul><li>In foreign exchange, Overbought/Long arises when the amount purchased of a given currency is greater than the amount sold. </li></ul></ul></ul><ul><ul><li>Oversold / Short </li></ul></ul><ul><ul><ul><li>In foreign exchange operations, when the amount of the given currency sold is greater than the amount purchased </li></ul></ul></ul>
  4. 4. <ul><ul><li>Net open position </li></ul></ul><ul><ul><ul><li>Bank is both a buyer and seller of a foreign currency. However, it is required to maintain at the close of business each day, square (i.e. sales matching purchases) or near square positions in each foreign currency after taking into account all the purchases and sales, (both spot and forward) to avoid any exchange risk. </li></ul></ul></ul><ul><ul><ul><li>In order to maintain effective control over its purchase and sale operations and to determine a ready net position of its operations, for the purpose of squaring off cover transactions, it maintains a book known as position book. </li></ul></ul></ul><ul><ul><ul><li>The currency position is the difference between the days total sales and purchases of a particular currency </li></ul></ul></ul>
  5. 5. <ul><ul><li>Cover operation / cover deals </li></ul></ul><ul><ul><ul><li>A long position will indicate, that the dealer has a surplus in that currency and, in order to square of his position, he is required to dispose of this surplus in the inter bank market or international exchange market in London or New York. </li></ul></ul></ul><ul><ul><ul><li>In case of a short position of a currency the dealer will be require to acquire that amount from the inter bank market or the international market. </li></ul></ul></ul><ul><ul><ul><li>These operations disposal (sales) and acquisition (purchases) by the dealer are known as cover deals. </li></ul></ul></ul>
  6. 6. <ul><ul><ul><li>At the end of the day these cover deals are recorded in the position book and it is ensured that the overbought/oversold position is converted into near square position. </li></ul></ul></ul><ul><ul><ul><li>The activity of squaring off transactions as they occur against an already available position or by going straight to the interbank market-is termed as covering. The operation is termed as cover operation. </li></ul></ul></ul><ul><ul><ul><li>The term signifies that every transaction that a customer / merchant originates is covered immediately – a ‘sale’ to a merchant by an interbank ‘purchase’, or a ‘purchase’ from a merchant by a interbank ‘sale’. </li></ul></ul></ul>
  7. 7. <ul><ul><li>Overnight Position </li></ul></ul><ul><ul><ul><li>Overnight position is defined as total amount that the dealing room can be oversold (short) or overbought (long) in different currencies. </li></ul></ul></ul><ul><ul><ul><li>As exchange market conditions can be very fluid and unpredictable the management of a bank keeps a close watch on the dealers position at the close of business each day to ensure that the position is within the set limit </li></ul></ul></ul><ul><ul><ul><li>Since the dealer are in constant touch with the market developments in the course of operations during the day, they can cut their losses /or protect their gains by closing out the positions during the day, if the rates move against them. </li></ul></ul></ul><ul><ul><ul><li>Whereas between the closing of one working day and the opening of another, their position may get locked-in and it may turn out to be too late to cut losses. </li></ul></ul></ul>
  8. 8. <ul><ul><li>Intraday / day light limits </li></ul></ul><ul><ul><ul><li>Intraday / day light limits refer to the total open or uncovered positions in the various currencies that may have to maintained by a dealer at any time during the business day in customers as well as inter bank business. </li></ul></ul></ul><ul><ul><ul><li>The management of a bank lays down the limits on the maximum position in all major currencies that may remain uncovered at any time during the day. </li></ul></ul></ul>
  9. 9. <ul><ul><li>Gap limits </li></ul></ul><ul><ul><ul><li>In foreign exchange transaction, the gap refers to the period between the maturities/deliveries for purchases and the maturities/deliveries for sales of each foreign currencies (exchange gap) </li></ul></ul></ul><ul><ul><ul><li>Individuals gap limits (IGL) </li></ul></ul></ul><ul><ul><ul><ul><li>It is essential that the management in each bank should lay down an individual gap limit (IGL) in absolute terms for each currency which will apply to the net position in each forward month weather overbought (plus position) or oversold (minus position), excesses over which will need the approval of the top management. </li></ul></ul></ul></ul>
  10. 10. <ul><ul><ul><li>Aggregate gap limits (AGL) </li></ul></ul></ul><ul><ul><ul><ul><li>The management also lay down an aggregate gap limit (AGL) which applied to the sum total of the gaps in each currencies which should be arrived at by adding (not netting), the plus and minus position of each month </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The aggregate gap limit should normally be related to the owned funds of the banks (i.e. capital +reserve) in order to reflect the capacity of the bank to absorb losses arising from existence of gap </li></ul></ul></ul></ul>
  11. 11. <ul><li>Back Office – the back office consists broadly of the settlement section. The settlement section is attached to the dealing room (though not controlled by it) and acts as the latter’s immediate support structure. Responsibilities and functions of the back office include the following </li></ul><ul><ul><li>Processing of deals generated by dealers. </li></ul></ul><ul><ul><li>Issuing and receipt of contract notes and deal confirmations. </li></ul></ul>
  12. 12. <ul><ul><li>Keeping track of payables and receivables resulting from inter bank contracts entered into by the dealers. </li></ul></ul><ul><ul><li>Ensure that timely deliveries and receipts are indeed effected; settling compensation claims for delays. </li></ul></ul><ul><ul><li>Fund management, maintaining required balances in the Nostro accounts. </li></ul></ul><ul><ul><li>Maintaining position book, gap records, assist the chief dealer with required information and data to enable him take an informed decision. </li></ul></ul><ul><ul><li>Implement the guidelines, rules and norms prescribed by the Exchange Control Department of the central bank as well as the bank authority themselves. </li></ul></ul>
  13. 13. <ul><ul><li>The merchant desk acts as the bridge between the branches (and their customers) and the dealing room. </li></ul></ul><ul><li>Mid Office – Risk Management, check over the risk taken by the dealers, market information </li></ul><ul><li>Foreign currency position, Mirror Accounts Import Suspense a/c – valuation FIDAIE Rate </li></ul>
  14. 14. Major Risk (Dealing Room) <ul><li>Operation risk – arises human error, technical faults, infra breakdown, faulty system procedure and internal control </li></ul><ul><li>Exchange risk – fluctuations in exchange rate </li></ul><ul><li>Credit risk – Inability of the counter party to meet the obligation </li></ul>
  15. 15. <ul><li>Pre settlement risk – failure of the counter party before maturity of the deal </li></ul><ul><li>Settlement risk – failure of the counter party during the course of settlement due to the time zone difference </li></ul><ul><li>Liquidity risk – unable to meet its funding requirement </li></ul><ul><li>Gap risk/ interest rate risk - gaps are to be filled by the bank by paying / receiving appropriate forward differentials. The forward differentials are in turn a function of interest rates and adverse movement of interest rate would result adverse movement of forward differential. </li></ul>
  16. 16. <ul><li>Market risk – party unable to exit / cover offset a position quickly at a resonable price </li></ul><ul><li>Legal risk – risk of non enforceability </li></ul><ul><li>Systematic risk – risk of major bank failure </li></ul><ul><li>Country risk- local govt regulations or political or economic instability in the country. </li></ul><ul><li>FX dealing operations are considered to be profit center. Exchange profit </li></ul><ul><li>Clear functional separation of dealing and back office, accounting and reconciliation. </li></ul>

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