Intro to FX & Caplin

Question 1

What department(s) of a bank does Caplin’s products focus on?

Answer 1

We focus on the Global Markets Department, also known as “Trading and Sales” or “Corporate Sales” or “Treasure sales.” This includes:
1) Equities
2) FICC
3) Services (Prime Brokerage or potentially outsourced back-office functions)

Question 2

What are Equities?

Answer 2

Involves the buying and selling of stocks (ie Apple)

Question 3

What is FICC?

Answer 3

Fixed Income, Currencies/FX, Commodities

Question 4

Why is Caplin’s target department Global Markets?

Answer 4

Caplin is vital in global markets because it enables efficient trading and sales via GUIs (Graphical User Interfaces) that allow clients and salespeople to execute trades quickly and effectively. Anytime banks deal with a high volume of trades for low value they will need automated workflows to help ensure profitability and regulations.

Question 5

What are the main roles within the global markets department?

Answer 5

The global markets department includes:

Trading: Executing trades and managing market risk.

Sales: Connecting with clients to facilitate and manage trades.

Risk Management: Overseeing and mitigating financial risks from trading activities.

Question 6

Who are the dominant FX market makers, and what do they do?

Answer 6

The FX market is dominated by six major players:
UBS, Citi, JP Morgan, Deutsche Bank, HSBC, and non-bank provider XTX Markets.

These market makers provide liquidity and set FX prices. Other banks often turn to these big players for FX services for their clients.

Question 7

What is the difference between “real money” and “fast money” in FX?

Answer 7

Real money does not borrow or leverage to buy the securities but has the actual cash required to buy the securities. Compare this to Fast Money Accounts which use leverage to amplify investments.

Real Money Accounts are typically used by asset managers like Vanguard while fast money is typically used by hedge funds.

Question 8

Why do central banks need FX?

Answer 8

Central banks need foreign currency reserves to stabilize markets during destabilizing events, allowing them to manage currency flows and international economic stability.

Question 9

Why do corporates need FX?

Answer 9

Corporates, ranging from large multinational firms like Google and Boeing to small businesses, need FX to purchase goods or services in different currencies for international trade.

Question 10

What is the difference in FX sales coverage between SMEs and big corporates?

Answer 10

SMEs (Small-Medium Enterprises): Each salesperson manages 300-400 clients.

Big Corporates: Each salesperson manages 30-40 clients, providing more personalized service.

Question 11

What role do brokers play in FX markets?

Answer 11

Brokers, such as Ebury, act as intermediaries between clients and banks, offering better FX rates by leveraging their connections with larger exchanges and avoiding high bank fees.

Question 12

What is the key difference between FX sales and traders?

Answer 12

Traders: Take on risk, managing price fluctuations and building strategies around FX and interest rates.

Sales: Non-risk takers who cover specific client types, providing advice on trading strategies and ensuring clients get the best execution based on their needs.

Question 13

What are the main types of FX traders and their roles?

Answer 13

Spot Traders: Manage short-term trades and immediate currency exchange risk.

Interest Rate Traders (Short Term): Focus on interest rate differences for currencies within a year.

Interest Rate Traders (Long Term): Handle longer-term interest rate risks, with bonds ranging up to 30-40 years.

Options Traders: Specialize in building FX interest rate structures (options).

Electronic/Algos Traders: Create and refine electronic pricing models, handling high-volume and large trades.

Question 14

How is FX sales coverage specialized (how are sales teams divided)?

Answer 14

Sales teams are divided to focus on specific client types:
Real Money (asset managers, pensions)

Fast Money (hedge funds)

E-risk (clients requiring electronic trading solutions)

Question 15

What do electronic/algo traders do in FX markets?

Answer 15

They build and fine-tune prices electronically, up to 20-30 times a second. They also manage large trades (e.g., quarter-billion-dollar trades) by adjusting prices slightly to manage the risk of massive transactions.

Question 16

Why is it important to understand the specific roles of clients in FX trading?

Answer 16

Different clients (e.g., hedge funds vs asset managers) have unique needs, workflows, and concerns. Understanding who leads conversations (sales, traders, or technology) and their interests ensures that solutions are tailored effectively.

Question 17

Who are the key players in FX markets?

Answer 17

The key players in FX markets include:
Market Makers
Corporates
Regional Banks
Brokers
Central Banks
Hedge Funds (fast money)

Question 18

What is Foreign Exchange (FX) trading?

Answer 18

FX trading is the global marketplace for buying and selling currencies. It enables currency conversion for international trade, investments, and financial operations, making it the largest financial market in the world.

Question 19

What are the main types of FX products/trades?

Answer 19

Spot: Immediate exchange of currencies.
Forward: A contract to buy/sell currencies at a future date and fixed price.
Options: Derivatives that give the right, but not obligation, to buy/sell currencies in the future.
Swaps: Simultaneous buying and selling of currencies for different dates.

Question 20

What are liquidity providers in FX trading?

Answer 20

Liquidity providers, such as major banks and non-bank entities, supply currency in the market by quoting buy and sell prices. They help ensure smooth transactions and competitive pricing in the FX market.

Question 21

What is a currency pair in FX trading?

Answer 21

A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. Example: EUR/USD, where EUR is the base currency and USD is the quote currency

Question 22

What is the spread in FX trading?

Answer 22

The spread is the difference between the bid (buy) and ask (sell) prices of a currency pair. It’s a key way market makers earn profits and reflects liquidity and volatility in the market.

Question 23

What are some of the most common currency pairs and their nicknames?

Answer 23

GBP/USD: Cable
EUR/USD: Euro Dollar
USD/JPY: Dollar Yen
AUD/USD: Aussie
USD/CAD: Loonie
NZD/USD: Kiwi
USD/CHF: Swissy

Question 23

What happens after an FX trade is executed?

Answer 23

After execution, several processes follow:
Affirmation: Both parties verify and agree on the trade details.
Confirmation: A formal record of the agreed trade terms is sent and acknowledged.
Exchange of Settlement Instructions: Instructions for the transfer of funds between parties are exchanged.

Question 23

What is affirmation in FX trading?

Answer 23

Affirmation is the process where both parties to the trade verify and agree on the trade details (e.g., amounts, currency pairs, and settlement dates) before moving forward.

Question 24

What is hedging in FX?

Answer 24

FX hedging is the process of using financial instruments like forwards or options to reduce exposure to currency risk, helping companies and investors protect against potentially unfavorable exchange rate movements.

Question 24

What is confirmation in FX trading?

Answer 24

Confirmation is the formal exchange and acknowledgment of trade details between the two parties involved, ensuring all terms are correct before settlement.

Question 24

What is currency volatility in FX markets?

Answer 24

Currency volatility refers to the fluctuation in exchange rates over time. High volatility increases risk and opportunity, while low volatility suggests more stable market conditions.

Question 24

What is netting in FX trading?

Answer 24

Netting is the process of consolidating multiple FX trades between the same parties, offsetting amounts to minimize the number of actual payments and reducing transaction costs and risks.

Question 25

What are FX options, and does Caplin offer an options product?

Answer 25

FX options give the holder the right, but not the obligation, to buy (call) or sell (put) a currency at a future date at a set price. Caplin does not have an options product yet, but we have prototypes and understand the requirements. Clients are interested in simplified GUIs for sales teams to execute standard option strategies.

Question 25

What does it mean to agree on a fixing rate in FX?

Answer 25

Agreeing on a fixing rate involves selecting a set exchange rate for a particular transaction, often based on a standard daily market rate, which determines the currency conversion used for settlement.

Question 25

What does it mean to exercise an in-the-money FX option?

Answer 25

Exercising an in-the-money FX option means using the option because the current market rate is more favorable than the strike price, allowing the option holder to profit from the exchange.

Question 26

What is a Non-Deliverable Forward (NDF), and does Caplin offer this product?

Answer 26

An NDF is a forward contract for restricted currencies where the currency cannot be physically delivered (e.g., Korean Won). It is settled in a base currency, and no restricted currency changes hands. Caplin does have an NDF product. The platform highlights NDF trades with a pop-up for the fixing date.

Question 27

What is Mark to Market in FX, and how is it used with NDFs?

Answer 27

Mark to Market ensures that, during the duration of a contract (like an NDF), the trade’s value is reassessed periodically to verify that both parties can cover their obligations. If a party can’t, they must post margin or the position can be closed out.

Question 28

What are FX algos and orders, and does Caplin offer them?

Answer 28

FX algos (algorithmic trading) involve executing trades based on predefined conditions, like profit or loss thresholds. Caplin has order management, including:

Resting Orders: Trigger a trade when a price hits a target.

Take Profit: Sell once a specific profit is reached.

Stop Loss: Stop trading after a set loss.

Caplin does not yet offer algos, of which Time Weighted Average Price (TWAP) orders is the most simple

Question 29

What is an OCO (One Cancels the Other) order in FX, and does Caplin support this?

Answer 29

An OCO order means that if one of the orders (profit or stop loss) is triggered, the other is automatically cancelled. Caplin supports OCO orders as part of its resting orders functionality.

Question 30

How do banks make money in FX trading?

Answer 30

Bid/Ask Spread: The difference between the buy and sell price, which varies by:
—Currency pair
—Deal size
—Client type (corporates get a wider spread, institutions a lower spread)
—Riskiness of the flow
—Client relationship value
—Internalization of trades

Commercial Margin or Mark-Up: Adjusting the spread slightly to add profit for the bank. Digital markets have reduced margins, so every bit of added value matters.

Fees for Algos: Banks charge a fee for using algos, which generates fee income instead of spread income.

Question 30

What compliance terms should I be familiar with in FX trading and what should I know about regulation?

Answer 30

Caplin helps banks with compliance by:

Supporting KYC (Know Your Client) and AML (Anti Money Laundering) checks, ensuring clients are properly verified.

Each country has their own set of regulations on anything other than a spot trade

Question 31

What are key FX market regulations and how do they impact trading?

Answer 31

FX markets are largely self-regulated under the FX Global Code, which outlines acceptable practices. Additionally, netting agreements (such as ISDA) are used to reduce risk, ensuring that all sides of a transaction are settled, even in cases like bankruptcy

Question 32

What are the key steps in post-trade operations, and how does Caplin add value?

Answer 32

The key steps in post-trade operations are:
1) Affirmation: Both parties agree on the trade, usually via email or electronic chat.
2) Confirmation: A legally binding document sent out after the trade.
3) Settlement Instructions (SI): Specifies where the money will be sent.
4) Netting: Aggregating multiple trades to reduce the number of individual settlements.

Caplin adds value by automating settlement instructions, pushing responsibility to clients, and integrating with systems like Accuity to ensure accuracy. This reduces manual errors, boosts productivity, and enhances client satisfaction.

Question 33

What post-trade processes does Caplin help automate?

Answer 33

Caplin helps automate several post-trade processes, including:
–Affirmations
–Confirmations
–Settlement Instructions (SI) management
–Netting
–Bulk pricing
–Approvals and invoices

By automating these processes, Caplin improves reliability, reduces errors, and frees up sales teams to focus on profit-generating activities instead of administrative tasks. This also ensures better audit trails and record-keeping.

Question 34

What is the value of automating Settlement Instructions (SI), and how does Caplin support this?

Answer 34

Automating SI reduces the manual workload for sales teams, freeing them from handling client instructions about where to send payments. Caplin also integrates with Accuity to ensure instructions are accurate, and allows clients to manage their own SIs, improving efficiency and reducing errors. This change transforms the settlement process from days to minutes, improving both productivity and client satisfaction.