10th June, 2004
trading guidelines will limit opportunities for
After a gestation period of nearly
18 months two of Australia's leading financial industry associations have
delivered a set of guidelines that they hope will significantly limit the
risks of mistakes and mishandling in foreign exchange trades.
The Australian Financial Operations
Association (AFOA) and the Finance and Treasury Association (FTA) this
week released to their members the new guidelines which set out procedures
for straight through processing, a process for confirming foreign exchange
transactions between banks and their corporate clients.
The AFOA represents
approximately 70 institutions including all of Australia's major banks,
while the FTA has some 1400 members nationally
who are individual financial risk
management professionals, predominantly working in Australia and the Asian
The new guidelines propose that
confirmation of FX trades must be made within two hours of the trade being
made by one of three agreed confirmation methods: email, a confirmation
matching system such as SFE Austraclear, or internet portal trading
According to AFOA chairman, Kevin O'Sullivan, the new guidelines will
significantly improve controls in the risky FX trading environment.
"Currently, those entering into a
trade don't have the certainty of knowing that they've dealt at a
particular rate until they have received confirmation of the trade. By
establishing a two-hour limit in which confirmations must be received
we're effectively narrowing the opportunity for errors to take place," Mr
"And by focussing on these agreed
electronic confirmation formats, we can speed up the discovery of
mismatches, replace the relatively costly manual handling processes of
printing, signing and faxing confirmations, and free up time to better
handle problem trades."
In recent years several high-profile FX scandals have cost banks and
corporate traders billions of dollars. "We've taken on board lessons from
recent fraudulent trading activity such as the case involving Allfirst
Bank in the United States which cost the Allied Irish Bank US$691million,"
said David Michell, technical director and deputy CEO with the FTA.
"We acknowledge that some of our members may still be relying on verbal
and fax confirmations, but these new guidelines, if adopted, will offer a
greater degree of surety for them and their counter-parties."
The guidelines, which both the FTA and AFOA have recommended their members
adopt, represent a step towards the automation of all financial
include a case study of a corporate moving to straight through processing
of confirmations, as well as a series of appendices that show elements of
the technical solution, possible confirmation matching service providers,
and a diagrammatic description of the old, and the recommended process.
It is the first such development
between the Australian banking and corporate sectors.
Members interested in viewing the
guidelines or furthering their knowledge of the legal issues should go to
www.afoa.com.au where a fuller
description of the various legal issues pertaining to confirmations is to
be found. It takes the form of questions with possible answers. The FTA
and AFOA sought independent advice from Mallesons Stephen Jaques, with
regard the role of confirmations and the legal discussion paper has
benefited greatly from their input.