Foreign Exchange Operations: Master Trading Agreements, Settlement, and Collateral

Preface

The topic of this book is foreign exchange operations. At the outset, there is the question of why to study operations. The answer comes in three parts.

First, there are the practical reasons. The sums of money that are traded in the foreign exchange market are utterly massive. This makes for an enormous incentive to improve the functioning and accuracy of not just the dealing room but also the operations facility. Specifically, learning about operations can help to reduce costly mistakes. Mistakes can be expensive because they cause positions to be incorrectly hedged and create inadvertent exposure to risk. Additionally, there is always the possibility for fraud. Realistically, financial markets are natural breeding grounds for fraud, not just in sales and trading but also in operations. One objective in learning about operations should be to make fraud close to impossible to carry out, and, if it does occur, easy to discover.

The second reason for being interested in this subject is that digging into operations leads to encounters with financial history. One can learn how financial infrastructure developed as the product of changes in the foreign exchange market, legal practices, technology, and institutional arrangements.

The largest spur to the development of modern operations was the collapse of the Bretton Woods agreement in the early 1970s. This led to the creation of floating, or nearly floating, exchange rates among major currencies. During the next four decades, ...