FMAC: Best Market Practices

GUIDELINES TO BEST MARKET PRACTICES FOR FINANCIAL MARKET PERSONNEL IN THE CANADIAN FOREIGN EXCHANGE MARKET

Canadian Foreign Exchange Committee
Canadian Committee for Professionalism
Financial Markets Association of Canada

April 1997

Note: The Guidelines formed the standard for Best Market Practices until June 2001 when the Canadian Foreign Exchange Committee, the Canadian Committee for Professionalism, and the Financial Markets Association of Canada adopted The Model Code published by the international ACI - The Financial Markets Association.

These guidelines on best practices are intended to serve as a reference for all market participants when they undertake, arrange or administer transactions in the foreign exchange market. In this document, foreign exchange personnel include management, sales, front-office dealing (trading), and back-office operations personnel.

The concept of “best practices” refers to the principles and practices of current market behaviour, including those provided in the Guidelines to Market Behaviour for the Canadian Foreign Exchange Market, issued by the Canadian Foreign Exchange Committee in June 1990, and the Code of Conduct issued by the Association Cambiste Internationale (ACI). These best practices, however, provide a comprehensive update on market practices designed to encourage behaviour that enhances efficiency and professionalism by those involved in Canadian financial markets and to promote public confidence in the integrity of Canadian financial markets. Guidelines on market practices related to risk management and disclosure are available from the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Deposit Insurance Corporation (CDIC).

Although these guidelines are intended as “minimum” best practices for foreign exchange personnel, they do not create any legally enforceable obligations, duties, rights, or liabilities. Failure by market personnel to comply with any of these best practices will be dealt with by their respective institution. It is incumbent on all personnel to advise management of situations where there may be breaches of these best practices. Similarly, it is recommended that each financial institution establish specific procedures to handle complaints in order to ensure that clients’ problems are dealt with quickly and effectively.

All financial institutions participating in Canadian financial markets are encouraged to observe the practices outlined here and, as necessary, introduce or revise their own codes of conduct in an effort to maintain market standards. These best practices supplement, rather than replace, other existing codes of conduct and rules that may be in place at individual institutions, and are in addition to any and all applicable laws and regulations.

A financial institution should have its own written policies and procedures approved by its board of directors, a committee of the board, or an appropriate level of senior management, governing the role and responsibilities of foreign exchange personnel. The financial institution should ensure that foreign exchange personnel are adequately trained and supervised so that their conduct is consistent with current market practice and complies with internal policies and procedures, including the institution’s code of conduct, and/or legal and regulatory requirements.

(i) Dealing practices
Foreign exchange personnel must recognize that they have been selected for a position of great trust and responsibility, and should conduct themselves accordingly. They should comply with management’s policies and limitations and with procedures relevant to their role and responsibility, and conform to all legal and administrative constraints.
When acting on behalf of their institution, foreign exchange personnel (including management, sales, front-office dealing (trading) and back-office operations):

GUIDELINES TO BEST MARKET PRACTICES FOR FINANCIAL MARKET PERSONNEL IN THE CANADIAN FOREIGN EXCHANGE MARKET Canadian Foreign Exchange Committee Canadian Committee for Professionalism Financial Markets Association of Canada April 1997 Note: The Guidelines formed the standard for Best Market Practices until June 2001 when the Canadian Foreign Exchange Committee, the Canadian Committee for Professionalism, and the Financial Markets Association of Canada adopted The Model Code published by the international ACI - The Financial Markets Association. Table of Contents 1. Best Market Practices - Purpose and Application 2. Responsibilities of the Board of Directors and Senior Management 3. Responsibilities of Foreign Exchange Personnel (i) Dealing practices (ii) Confidentiality (iii) Conflict of interest (iv) Suspicious transactions (v) Gifts and entertainment (vi) Training 4. Further Inquiries Best Market Practices — Purpose and Application These guidelines on best practices are intended to serve as a reference for all market participants when they undertake, arrange or administer transactions in the foreign exchange market. In this document, foreign exchange personnel include management, sales, front-office dealing (trading), and back-office operations personnel. The concept of “best practices” refers to the principles and practices of current market behaviour, including those provided in the Guidelines to Market Behaviour for the Canadian Foreign Exchange Market, issued by the Canadian Foreign Exchange Committee in June 1990, and the Code of Conduct issued by the Association Cambiste Internationale (ACI). These best practices, however, provide a comprehensive update on market practices designed to encourage behaviour that enhances efficiency and professionalism by those involved in Canadian financial markets and to promote public confidence in the integrity of Canadian financial markets. Guidelines on market practices related to risk management and disclosure are available from the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Deposit Insurance Corporation (CDIC). Although these guidelines are intended as “minimum” best practices for foreign exchange personnel, they do not create any legally enforceable obligations, duties, rights, or liabilities. Failure by market personnel to comply with any of these best practices will be dealt with by their respective institution. It is incumbent on all personnel to advise management of situations where there may be breaches of these best practices. Similarly, it is recommended that each financial institution establish specific procedures to handle complaints in order to ensure that clients’ problems are dealt with quickly and effectively. All financial institutions participating in Canadian financial markets are encouraged to observe the practices outlined here and, as necessary, introduce or revise their own codes of conduct in an effort to maintain market standards. These best practices supplement, rather than replace, other existing codes of conduct and rules that may be in place at individual institutions, and are in addition to any and all applicable laws and regulations. Responsibilities of the Board of Directors and Senior Management A financial institution should have its own written policies and procedures approved by its board of directors, a committee of the board, or an appropriate level of senior management, governing the role and responsibilities of foreign exchange personnel. The financial institution should ensure that foreign exchange personnel are adequately trained and supervised so that their conduct is consistent with current market practice and complies with internal policies and procedures, including the institution’s code of conduct, and/or legal and regulatory requirements. Responsibilities of Foreign Exchange Personnel (i) Dealing practices Foreign exchange personnel must recognize that they have been selected for a position of great trust and responsibility, and should conduct themselves accordingly. They should comply with management’s policies and limitations and with procedures relevant to their role and responsibility, and conform to all legal and administrative constraints. When acting on behalf of their institution, foreign exchange personnel (including management, sales, front-office dealing (trading) and back-office operations):
•	Will enter into only those transactions that they feel are prudent in light of existing market conditions and will not assume positions, even with management approval, that, in good conscience, they know are of such high risk so as to jeopardize the financial institution’s capital or the funds of its depositors.
	Will conduct the financial institution’s business in accordance with established market behaviour, both as to the definitive practices and the intent of such practices.
•	Will ensure that internal policies and procedures regarding segregation of front-office and back-office duties are strictly adhered to, so that trading personnel do not issue or receive transaction confirmations, nor receive or make payments.
•	Will provide both timely and accurate price quotations, as market conditions dictate.
•	Will not purposely create a position for a broker, nor condone or assist a broker in maintaining a position.
•	Will refer all instances in which transactions by brokers cannot be completed or in which trades are in dispute to the appropriate senior manager for review and action in a timely fashion.
•	Will not purposely provide misinformation that could be damaging to the financial institution, the market, any professional counterparty or customer.
•	Will not take advantage of an obvious misquote by any counterparty.
•	Will make every effort to resolve disputes at a local level between dealers or other counterparties.
•	Will prepare a written report as soon as possible in the event that a dispute between dealers or other counterparties is not resolved at a local level, and refer serious cases to a superior.
•	Will ensure that all telephone lines in the dealing room as well as selected lines in the middle/back offices are being recorded, as necessary (and that recordings are retained for a reasonable time), to assist with resolution of disputes with counterparties, and to confirm that employees are conforming with current market practice.
•	Will stand by their word in all direct dealings between financial institutions and customers or through intermediaries.
•	Will ensure that internal policies and procedures regarding backoffice functions are adhered to.
•	Will discourage improper conduct in the market or improper conduct by others in the various foreign exchange dealing units, and promptly report any improprieties to members of senior management who are not involved in the perceived impropriety.
•	Will not enter into any off-market transactions with a counterparty without the specific approval of senior trading room management.
•	Will not use historical rates in the case of rolling over a maturing forward transaction without the specific approval of senior trading room management.
•	Should be familiar with currently used technical jargon in order to avoid misunderstandings.
•	Will conduct themselves in a courteous and professional manner at all times with clients and counterparties.
(ii) Confidentiality Confidentiality is essential for a reputable and efficient market. Therefore:
•	Sales and trading personnel must hold all information about customers in the strictest confidence.
•	Details of any transaction or prospective transaction are to be known only to the appropriate staff within the financial institution.
•	All transactions, concluded or not, must remain confidential. These transactions include any deals completed for the financial institution’s own account, a professional counterparty or a customer’s account.
•	Cellular phones must not be used to communicate confidential information.
•	Information relating to the financial institution’s trading and planning strategies must be tightly controlled.
•	Certain activities must be monitored closely to ensure that confidentiality is not breached. These include:
-	visits to the trading room by outsiders; and
-	the use of speaker phones that allow the outside party to hear activity in the trading room.
•	A dealer must not deal from the offices of another financial institution or broker, nor should a broker or a dealer from another financial institution be allowed to deal from the financial institution’s office.
•	Foreign exchange personnel should advise the appropriate senior managers of any breaches of confidentiality. These would include breaches by:
-	colleagues;
-	counterparties, as it relates to transactions conducted with them; and
-	brokers.
(iii) Conflict of interest
•	Trading and sales personnel will fulfill their institutional responsibilities objectively, in an unbiased fashion.
•	Foreign exchange personnel will abide by their institution’s rules for trading for their own account, including obtaining appropriate pre-approval, in order to avoid apparent or actual conflict of interest and distraction from duties. They will conduct all of their private business and personal activities in a manner that avoids apparent and actual conflict with the interests of their own financial institution and its clients.
•	Transactions for the financial institution’s own account or for clients must not be done on the basis of inside information nor should such information be passed on to others.
(iv) Suspicious transactions
•	Foreign exchange personnel should be alert to transactions that may be linked to illegal activities (e.g., money laundering). These transactions may come in the form of an agent requesting the conversion of a large amount of currency. These transactions often offer high commissions that the agent may indicate will be wired by a large, well-respected international bank to lend legitimacy to the transactions.
•	Other common fraud schemes include:
-	offers to sell and eventually repurchase prime bank notes and standby letters of credit;
-	mail and advance fee frauds; and
-	the luring of deposits by “shell” banks.
•	It is important for foreign exchange personnel to be cautious of all business transactions until satisfied of their validity. The “know your customer” rule is of paramount importance when presented with suspicious transactions. In particular, foreign exchange personnel should be skeptical when:
-	an agent requests the conversion of a large foreign exchange transaction;
-	presented with proposals with inordinately high commissions/ returns or with confusing details;
-	counterparties supply vague answers to queries; or
-	entering into transactions with counterparties in unfamiliar locations.
•	All unusual incidents should be reported to a supervisor immediately.
(v) Gifts and entertainment
•	When acting for their financial institution, foreign exchange personnel should only offer or accept gifts and entertainment of modest value, and seek the advice of management when in doubt as to the appropriateness of any gift or offer of entertainment.
•	Business should not be directed to any counterparty, especially brokers, as reciprocation for gifts, entertainment or favours. Any such benefits received are to be declared openly.
•	The offer of any unusual favours should be made known to senior management immediately.
•	Foreign exchange personnel should avoid potentially embarrassing situations so as to reduce the chances of creating an impression of indebtedness.
•	Expenditures should be reviewed and approved, if appropriate, by foreign exchange management.
(vi) Training
•	It is the responsibility of foreign exchange management to ensure that all personnel in market-related positions are properly trained to carry out their tasks in a professional manner, and are aware of their responsibilities and obligations. As part of their training, representatives are encouraged to complete the Association Cambiste Internationale (ACI) Diploma Course in Canada for foreign exchange professionals.
Further Inquiries These best practices have been prepared by the Canadian Committee for Professionalism (CCFP), a committee that is jointly sponsored by the Canadian Foreign Exchange Committee (CFEC) and the Financial Markets Association of Canada (FMAC). While independent, the CCFP reports regularly to both the CFEC and the FMAC, and advises both committees on matters relating to professional conduct in the foreign exchange market in Canada. For further inquiries on these best practices, please contact one of the following representatives: Chair of the Canadian Committee for Professionalism President of the Financial Markets Association of Canada See page ACIC .... on Reuters for up-to-date contact names and phone numbers.