CAIIB-BFM-MODULE-A-EXCHANGE RATES AND FOREX BUSINESS-Cont'd EXCHANGE RATES AND FOREX BUSINESS 47. Back office takes care of processing of Deals, Account, reconciliation etc. It has both a supportive as well as a checking role over the dealers.
48. Mid Office deals with risk management and parameterization of risks for forex dealing operations. Mid Office is also supposed to look after the compliance of various guidelines/instructions and is an independent function.
49. The major risks associated with the dealing operations are : # Operational Risk # Exchange Risk # Credit Risk # Settlement Risk # Liquidity Risk # Gap Risk/ Interest/ Rate Risk # Market Risk # Legal Risk # Systemic Risk # Country Risk # Sovereign Risk
50. The Operation Risk is arising on account of human errors, technical faults, infrastructure breakdown, faulty systems and procedures or lack of internal controls.
51. The Exchange Risk is the most common and obvious risk in foreign exchange dealing operations and arise mainly on account of fluctuations in exchange rates and/ or when mismatches occur in assets/ liabilities and receivables/ payables.
52. Credit risk arises due to inability or unwillingness of the counterpart to meet the obligations at maturity of the underlying transactions.
53. Credit Risk is classified into # Pre- Settlement Risk # Settlement Risk
54. Pre Settlement Risk is the risk of failure of the counter party before maturity of the contract thereby exposing the other party to cover the transaction at the ongoing market rates.
55. Settlement Risk is Failure of the counter party during the course of settlement, due to the time zone differences, between the two currencies to be exchanged.
56. Liquidity Risk is the potential for liabilities to drain from the bank at a faster rate than assets. The mismatches in the maturity patterns of assets and liabilities give rise to liquidity risk.
57. Gap Risk/ Interest Rate Risk are the risk arising out of adverse movements in implied interest rates or actual interest rate differentials.
58. Market Risk: This is arises out of adverse movement of market variables when the players are unable to exit the positions quickly.
59. Legal Risk is arising on account of non-enforceability of contract against a counter party.
60. Systemic Risk is the possibility of a major bank failing and the resultant losses to counter parties reverberating into a banking crisis.
61. Country Risk is risk of counter party situated in a different country unable to perform its part of the contractual obligations despite its willingness to do so due to local government regularizations or political or economic instability in that country.
62. Sovereign Risk is over all country risk
63. RBI has prescribed guidelines for authorized dealers, permitted by it, to deal in foreign exchange and handle foreign currency transactions.
64. FEMA 1999 also prescribes rules for persons, corporate etc in handing foreign currencies, as also transactions denominated therein.
65. The RBI is issued licenses to Authorized Dealers to undertake foreign exchange transactions in India.
66. The RBI has also issued Money Changer License to a large number of established firms, companies, hotels, shops etc. to deal in foreign currency notes, coins and TCs.
67. Full Fledged Money Changers (FFMC) : Entities authorized to buy and sell foreign currency notes, coins and TCs
69. Categories of Authorized Dealers; in the year 2005, the categorization of dealers authorized to deal in foreign exchange has been changed. Category Entities AD - Category I Banks, FIs and other entities allowed to handle all types of Forex AD - Category II Money Changers (FFMCs) AD - Category III Money Changers (RMCs)
70. Foreign Exchange Dealers Association of India, FEDAI (ESTD 1958) prescribes guidelines and rules of the game for market operations, merchant rates, quotations, delivery dates, holiday, interest on defaults , Handling of export – Import Bills, Transit period, crystallization of Bills and other related issues.
71. Export bills drawn in foreign currency, purchased/ Discounted/ negotiated, must be crystallized into rupee liability. The same would be done at TT selling rate.
72. The crystallization period can vary from Bank to bank, (For Export Bills Generally on the 30th Day) customers to customer but cannot exceed 60 days.
73. Sight Bills drawn under ILC would be crystallized on the 10th day after the due date of receipt if not yet paid.
74. All forward contracts must be for a definite amount with specified delivery dates.
75. All contracts, which have matured and have not been picked up, shall be automatically cancelled on the 7th working day, after the maturity date.
76. All cancellations shall be at Bank’s opposite TT rates. TT Selling = purchase contracts; TT buying = Sale contracts.
77. All currencies to be quoted per unit Foreign Currency = `, JPY, Indonesian Rupiah, Kenyan Schilling quoted as 100 Units of Foreign currency = `.