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C1 14/07/2017

FX SPOT
Introduction to FX SPOT
OVER THE COUNTER (OTC) - FX SPOT: WHAT, WHY?

Types of Securities Traded


OTC A contract between two parties agreeing on how a trade / agreement is to be settled in the future.

Why Do We Need Foreign Exchange?


The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that
need to trade currencies continually
Individuals and businesses trade currencies whenever goods are bought and sold abroad
Holidays and travelling, we require to exchange currencies to purchase products and services in a country with a different currency to
home
Example of corporations, one company to pay another company for service / product

What is a FX SPOT?
A contracted agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on
the value date
What is a Value date?

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FX SPOT VALUE DATE

Business days

1 2
Trade Value
Execution Delivery
Date Date

The value dates for most FX trades are "spot", which generally means two business days from the trade
date (T+2). The most notable exception to this rule is USD/CAD, which has a spot date one business day
from the trade date (T+1).

POP QUIZ!
Can you name another currency pair from Emerging which has a spot date (T+1) (Croatia HRK , Russian
RUB , Turkey TRY)
(Croatian HRK , Russian RUB , Turkish TRY)

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Comments: SG key service is to manage
OUR SERVICES clients risk.

AVAILABILTY SDP

Direct access to a range


of Pre-Trade, Execution,
Post-Trade and Financing
services, personalised to
meet your specific needs

SERVICE

CROSS CONNECT
DATA CENTRES MDP
LDN

NY 4th ?

TKY

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FX SPOT - RISKS

What are the Risks involved in FX Spot?


Settlement Risk - The risk that a counterparty in a transaction may not be able to fulfil its side of the agreement by failing to deliver
Volatile An unprecedented event cause markets to be volatile.
Events like BREXIT - the EU Referendum vote for United Kingdom, causing the EUR/GBP to be volatile.
Swiss National Bank (SNB) announcement that it would no longer hold the Swiss franc with the Euro, causing volatility with the
Swiss franc.
Volatility expected to increase in the near future regardless of being able to predict an event, it is crucial to make preparations!

Managing Risks
Price Gaps
A news event may take place on a weekend that can push prices significantly in one direction. The market is constantly moving
even though a traders access to that market may be limited at certain times.
As a result, there is a risk that prices gap and move quickly. This most frequently happens over the weekend and during news
events. However, it can happen anytime.
Therefore, the best way to manage this risk is by avoiding weekend exposure, avoid trading exotic markets, and avoid trading
through major news events.
Margin Requirements
Increasing margins is a way to cushion against volatile market conditions. When volatility increases, there is a greater credit risk to
the trader, so they manage the risk through margin increases.
Can be increased without warning
Spreads Widen
When banks become fearful or uncertain, they pull in their quotes which causes the reference and benchmark rates to widen out on
the bid and ask. As these spreads widen, it gets passed along into the retail market.

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SG SPOT PERFORMANCE - TOP CLIENTS AND CCY PAIRS

USD remains dominant


( JPY, AUD, significant and
increasing)

Rise of FX swaps (2016 65%)


moving away from FX Spot

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SALES CREDIT & PNL

How does SG make money?

Sales Credit Profit and Loss (PNL)


The measure of contribution from Sales is made up of two The PNL of SG is managed by Traders.
elements 1. Traders measure how profitable a client or strategy is
1. Hard Markup 2. They rely upon information from Sales
The amount added to the spread in order to make The more flow Traders receive the faster they can close a
extra money position, reducing the risk they take onboard
2. Technical Margin
A percentage of bid ask spread, which is attributed
to sales as a reward

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SUMMARY

What is FX Spot?
The simplest way to explain or understand FX Spot is
by its requirement...

WHY DO WE NEED IT?


to facilitate the exchange of one currency
into another for multinational corporations

Future of FX Spot
How does SG make money?
Sales Credit and PNL

Even if a client provides zero or very low sales


credit, their enquiries are relevant as they
provide relevant information to the traders.

Moving from Risk transfer to more Algo


Based, where we simply execute rather
than manage risk.

Algo 101, Black Belt

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THANK YOU

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FX SPOT - WHAT, WHY?

Managing Risks

We are going to cover 6 risks that grow more prominent in extremely volatile market conditions. Well follow up each risk with suggestions
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Read more about price gap risk.
2. Liquidity Thins
During times of risk aversion, the depth of available pricing begins to thin. The resulting illiquid conditions makes it difficult to get into and
out of positions without taking a hit on the price.
Some markets tend to be more liquid than others. Therefore, carefully choose a market that tends to be more liquid. These include, but
are not limited to, EURUSD, USDJPY, and GBPUSD, which are 3 of the more liquid FX markets. Stay away from exotic markets.
Markets such as ZAR, HUF, and CZK may see an imbalance of trading on the bid and ask which could make it difficult to trade.
Lastly, while in trades, maintain conservative amounts of leverage or no leverage at all. Providing a cushion of usable margin may help
prevent a margin call when the interbank market place pulls back its liquidity.
Read more on liquidity risk.
3. Increased Margin Requirements
Increased margin requirements is a safety mechanism for brokers and banks to cushion against volatile market conditions. When volatility
increases, there is an increased potential for larger market movements, illiquid markets, and gaps. These scenarios pose a greater credit
risk to the price makers and greater risk to the trader through negative balances. Brokers dont want to be on the hook for your losses so
they manage the risk through margin increases.
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Since margin requirements can be increased without warning, manage this exposure by avoiding markets with a known event risk taking
place. Also, steer towards the more liquid major markets for trading as their margin increases are likely to be less than exotic markets.
Sales Credit: measure the contribution from sales of business. Its made up of two elements: 1. Hard markup and 2. Technical
margin.

Hard markup (commercial margin): is the amount added to the spread in order to make extra money. Used to be bigger with more
imperfect and less transparent markets.
Technical margin: % of bid ask spread attributed to sales to reward them.

Even if a client provides zero or very low sales credit, their enquiries are relevant as they provide relevant information to the traders.
Sales people have a target sales credit to meet.

PNL: managed by traders, measure how profitable a client or strategy is. Depend on information from Sales.

Reminders/others:
The bigger the size the wider the spread since the transaction is riskier.
The more flow a trader receives, the faster they can close the position, taking less risks.
Distribute information regarding clients between market dealers is forbidden (collation).
On FX we only give two way prices skewed accordingly.
Recommendation: book Why arent they shouting by by Kevin Rodgers
FX Options: right to buy and sell but not obligated at a pre agreed price in the future.

Platforms used: MDP - 360T | BBG | DV | FXALL


MDP requires support from multiple banks
(SDP) BNP Cortex | Deutsche Autobahn

FXO Strategies:
Plain & Vanilla most used strategy PNL
Sales Credit Call: option to buy
Put: option to sell managed by traders, measure how profitable a client
The measure the &
Straddles contribution
Stranglesfrom sales of business. Its made up of two or strategy is.
elements: Straddle: both call and put at same strike price and expiry date (pay both premiums)
1. Hard markup
Strangle: both call and put at different strike price but same expiry date (maturity)
Depend(useful for predict
on information fromlarge price
Sales.
2. Technical margin.
movements)
Risk Reversal margin): is the amount added to the spread in The more flow a trader receives, the faster they can
Hard markup (commercial
Many close the position, taking less risks.
order to makemore...
extra money. Used to be bigger with more imperfect and
less transparent markets.
Distribute information regarding clients between
Premium: Buy Pay premium FUTURE
market dealers is forbidden (collation).
Sell
Technical margin: % of bid ask Receive
spread premium
attributed to sales to reward them.
The Number One Tier 2 Bank
On FX we only give two way prices skewed
Even ifOther:
a client provides zero or very low sales credit, their enquiries are
accordingly.
relevant as they
RTNS provide relevant
(Reuters information to
Trade Notification the traders.
Service)
Sales people have a target sales credit to meet.
End of year SG will be using SG MARKETS includes both Cash and FXO
FX Options Traders trade Spot to hedge their positions.
SLA between FXO Traders and Spot Trades to ensure fairness
FX research sites
https://www.scribd.com/document/247042942/Intro-to-FX-slides
https://www.scribd.com/doc/50752849/fx-ppt
https://www.scribd.com/document/199236713/Fx-Trainer
https://www.scribd.com/presentation/242334787/Currencies-and-the-FX-Spot-Market

BNP Paribas Securities Services adds forwards and swaps to its automated foreign exchange (FX) product and now offers auto-FX with 24 hour
coverage on 44 currencies.
BNP Paribas Securities Services has enhanced its FX platform FOX and now offers clients passive FX hedging. Based on simple rules (net asset
valuation of the portfolio, deal size and portfolio hedging cycle), the new system is able to evaluate hedging needs linked to an investment and to
process automatically forwards and swaps.
BNP Paribas Securities Services now also offers 24 hour FX coverage including additional autoFX batches via its European, Sydney and New-
York desks. It captures client FX orders on trade date, rather than the next day, hence minimising their exposure to FX volatility.
Florence Bonnevay, head of market and financing services, BNP Paribas Securities Services comments, In todays challenging environment,
clients are under increasing pressure to manage costs more effectively and minimise operational risk by automating processes. Our new offer
allows institutional clients to benefit from the comfort of having a comprehensive automated service that manages FX risk exposure on portfolios
invested in currencies.

JP Morgan
The purpose of this letter is to clarify the nature of the trading relationship between you and the Corporate & Investment Bank at JPMorgan Chase
& Co. and its affiliates (together, JPMorgan or the Firm) and to disclose relevant practices of JPMorgan when acting as a dealer, on a principal
basis, in the wholesale spot foreign exchange (FX) markets. We want to ensure that there are no ambiguities or misunderstandings regarding
those practices.
We ask that you read this letter because it sets forth our standard terms of spot FX dealing generally with our clients (together with other market
participants, counterparties) in principal-to-principal transactions in the wholesale spot FX markets (as well as when you act as agent for another
principal). It sets forth how we will communicate and transact in relation to requests for quotes, requests for indicative prices, discussion or
placement of orders and all other expressions of interests that may lead to the execution of transactions and our management of potential or actual
conflicts of interest in our principal-dealing and market-making activities.
JPMorgan is a global financial services firm that has operated and continues to operate as a dealer and market maker in the wholesale spot FX
market. As such, JPMorgan engages in price quoting, order taking, trade execution and other related activities. Unless otherwise agreed,
JPMorgan engages in these transactions as principal for the benefit of the Firm. In that capacity, JPMorgan does not act as agent, fiduciary or
financial advisor or in any similar capacity on behalf of its counterparties. JPMorgan is dedicated to upholding a high level of integrity and adhering