US foreign exchange dealers revise operational risk standards

The Foreign Exchange Committee, a 20-dealer industry liaison group to the New York Federal Reserve Bank, has made new recommendations for the exercise of in-the-money foreign exchange options in a revision to its 1996 forex operational risk best practices document, released last week. The move was spurred by last year’s debacle at a US-based division of Allied Irish Bank, where rogue trader John Rusnak used forex options to help hide five years of losses totalling over $691 million.

The revised document says determination of option in-the-moneyness and the subsequent notification of counterparties should be performed by an auditable electronic system. The document goes on to say that exercising options should be “segregated from sales and trading and performed by staff that liaise between the front- and back-office personnel". The document also states that “systems should be designed to auto-exercise in-the-money transactions”.

The Foreign Exchange Committee was formed in 1978 to spread forex industry best practices to reduce costs and improve risk management. Though the New York Federal Reserve Bank sponsors the committee, it has no enforcement powers.