Ch 5: The Dealing Process Flashcards
1
Q
Foreign exchange forward dealers
- operate in:
- trade the:
- forward dealer is concerned with:
A
- operate in: forward market
- trade the:differential between two interest rate markets on a cross border basis
- forward dealer is concerned with:course of interest rate differentials rather than the level of those currencies
- handles forward FX transactions to supply currency on a deferred basis
2
Q
Pre-deal processes / factors (8)
A
- Collate data (SSIs, auth sigs)
- Standard forms (KYC, etc)
- Review / reconcilce
- Obtain authorities to deal
- Internal systems
- Execute master agreements
- Establish new client limits (KYC)
- Agree confirmation & settlement procedures w/ client
3
Q
Establish new product - processes
A
- Identify new products & characteristics
- Standard forms & checklists (each department impacted is included in review process)
- Assess procedural change
- Assess internal systems
- Assess external systems to determine if suitable
4
Q
Master Agreement
- define
- ISDA =
- AFMA Guide:
A
- Master Agreement = standard agreement in OTC market to obviate need for lengthy agreement for each transaction. Defines all legal and credit issues upfront which then apply to all future transaction.
- ISDA = Internationalm Swaps and Derivatives Association, the most common master agreement, is used for a range of risk management products.
- AFMA Guide: “AFMA Guide to Australian OTC Transactions
5
Q
Pitch
A
Enter into negotiations with client.
6
Q
Trading position vs Cash position
A
Trading position:
- changes to prices give rise to risk of P/L
- Positions created from buying / selling securities.
- Borrowing/lending currency DOES NOT create trading position (these are interest rate exposures)
- Position created when transacted, not settled.
Cash position:
- net position of cash inflows and outflows on a given date, it does not give rise to P/L
- Money market transactions cfreate net cashflows when the transactions mature
7
Q
Cash flow positions
positive, negative and square
A
Positive cash flow; excess cash, higher profits if interest rates rise.
Negative cash flow; lower returns if interest rates rise because money needs to be borrowed
Square - no impact
8
Q
Global limits
- define
- comprised of
A
Limits reflect total exposure of financial institution, comprised of both interbank and forward limits.
9
Q
Types of orders (14)
A
- Limit (how much client is willing to pay (buy) or accept (sell) for financial product.
- If current price is better than or at the client’s limit order level, execute
- If price is worse than limit order, conult before proceeding - Market Order
- Order at specified price
- Order with discretion
- Stop loss
- order to buy in rising market or sell in falling market, commonly used to exit
- fast markets may move through the level, “slippage” - Take profit
- One cancels Other (OCO)
- Market on Opening (MOO)
- Market at Close
- Fill or Kill (FOK)
- Day Only
- Night only
- Good for the week
- Good till Cancelled
10
Q
7 step deal execution provess
A
- Order handlign (all trade details)
- Repeat order back
- Confirm order is within internal policy & limit req’s
- Ask for live price or place order
- Execute
- Interbank dealer passes execution details back to sales dealer
- Deal input
11
Q
Real Time Gross Settlement
A
- processing and final settlement of funds trader instructions take place simultaneously and in freal time
- Gross: settle individually without netting
12
Q
Reserve Bank Information and Transfer System (RITS)
A
- RITS = platform for Australia’s RTGS for cash
- allows electronic bidding of Commonwealth securties offered by AOFM and allows RBA to provide registry services for these securities
- Participants have moved to Austraclear
- RBA no longer settles CGS
- All wholesale electronic transaction in debt are settled on Austraclear (Australia)
13
Q
Austraclear Central Securities Depository
A
- owned by ASX
- holds clearing and settlement facility license
- Debt instruments must first be lodged with Austraclear
- RTGS (real time) and DVP
- corproate actions etc
- electronic model enables participants to link with overseas international central securities depositories, Clearstream, Euroclear. These links then don’t require direct participation with C/S or E/C
14
Q
Exigo
A
- facilitates electronic exchange of CDs, CP, govt & semi bonds, bills, bonds, FRNs & securitised assets.
- As securities traded or pledged as collateral, Exigo records change in beneficial ownership.
- facilitates confirmation and settlement of AUD FRAs and AUD IRS
- EXIGO is NOT a dealing room trading system or an exchange clearing house and does not become a party to the transaction
15
Q
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
A
- SWIFTNet: provides end to end solutions for financial services processing: payments & cash mgmt, treasury & derivatives, trade services, securities pre trade/trade, pre settlement, clearing & settlement, custody services, reporting
- role: transport data between 2 financial institutions
- messaging hub
