Forex Trade- Articles

Are you new to Forex Market ? There is a lot of information one should know as a FOREX currency trading beginner. If you have decided that your ultimate goal is to become an expert foreign exchange trader, you should take a look at some must-have information. The first thing that should concern you is to find out what exactly FOREX is all about. What is a Forex Market ? The Foreign Exchange Market goes by many names—Currency Exchange, Foreign Exchange, Forex, FX—but no matter the term, it is simply the trading of one currency against another. Currencies are traded in the form of currency pairs with pricing based on exchange rates and spreads established by participants in the forex market. Unlike many markets the FX market is open 24 hours per day and has an estimated $1.2 Trillion turnover every day. Evolution of Forex Market The forex market is an inter-bank or inter-dealer network first established in 1971 when many of the world’s major currencies moved towards floating exchange rates. It is considered as an overthe-counter (OTC) market, meaning that transactions are conducted between two counter parties that agree to trade via telephone or electronic network. OTC trades are not centralized in one location like some equity stock markets such as the New York Stock Exchange (NYSE) or the Chicago Options Board Exchange (CBOE) where options and futures are traded. As FX trading has evolved, several locations have emerged as market leaders. Currently, London, England contributes the greatest share of transactions with over 32% of the total trades. Other trading centers—listed in order of volume— are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney. As these trading centers cover most of the major time zones, FX trading is a true 24-hour market that operates five days a week. For example: as a trader in New York, you have access to the FX market starting Sunday evening when the market opens in Sydney for the start of the trading week. Trading centers around the globe then come online until New York closes at 4:30 PM EST. Of course, by this time, Sydney will have reopened for the next trading day so you can continue to trade round the clock until the New York close on Friday. With the advent of web-based trading applications small retail traders and even individuals now participate directly in the forex market on equal footing with large institutions. What does Forex market do? Individuals and organizations exchange currencies whenever they require foreign goods or services. Unlike many other securities (any financial instrument that can be traded) the FX market does not have physical market and central exchanges. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades are executed through phone and now increasingly through the Internet. It is only in the last few years that the smaller investor has been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition it is now easily in the reach of most investors. FOREX trading involves people buying and selling different currencies of the world. To be exact, every time you trade, you buy one currency while selling another. This is because currency trading always involves pairs. Thus, quotes of currencies will come in one currency paired with another. The major players include the U.S. dollar and the Canadian dollar (USD/CAD), the Euro and the U.S. dollar (EUR/USD), the U.S. dollar and the yen (USD/JPY), USD/CHF and the Australian dollar and the U.S. dollar (AUD/USD). The Main Players in Forex Market

1. Banks 2. Reserve banks 3. Hedge funds 4. Individual traders 5. Brokers Benefits of Forex Market There are many advantages to trading in the FOREX market. 1. The currency exchange market is a true 24-hour market, operating five days a week. As there is no central exchange it is not restricted to the operating hours of the various exchanges. 2. The transactions are fast because everything is electronic. There are so many people who are trading everyday and every hour of the day. You can buy and sell at anytime whenever you want to. 3. A currency transaction typically incurs no commission or transaction fee outside of the quoted spread (a small difference between buying and selling prices). 4. Key to any efficient market is high liquidity. High volumes and “round-the-clock” trading ensures an active market for currency traders and greater liquidity. 5. One other attractive aspect of currency trading is leverage. With very minimal initial cash you can already manage a large amount of currency. This is probably the main reason why the market is quite attractive for those who want to increase their earnings impressively. But it is wrong, however, to think that you can immediately get rich in FOREX trading. People can lose too in currency trading. If you do not take the time to learn the inner wheels of FOREX trading and the technical aspects of leveraging, then you could lose everything you have put into currency trading. Conclusion: As a FOREX currency trading beginner, the best way to make sure that you have a rewarding and fulfilling experience with currency trading is to prepare yourself before diving into actual trading. If you are a small-time online investor, you can pick an online company that can help you learn. Many of them will allow you to first practice trading with imaginary currencies without any substantial cost or loss to you. Position yourself as a beginner and learn from the seasoned player, you will have a good chance of becoming an expert in this field.

Operation of the Forex Market The International Forex Market is a non-physical market and has no central exchange. Participants in Forex market: The major participants in this foreign exchange trading market are Central Banks, prime multinational banks, large corporations, brokerage houses and individual investors. Forex agents offer various services to investors, including financial analysis, information gathering and market situation updates. Most transactions are conducted via the telephone or through online forex trading systems. The high liquidity in the forex market is due to the enormous volume of transactions generated by the primary market called the "interbank market" where banks, large financial institutions, insurance companies and other large corporations deal with each other in huge quantities to manage their own currency risks. The secondary “over-the-counter market”, where retail clients participate in forex transactions, has benefited from this liquidity provided by the big institutions. The growth of the average daily volume of Forex trading has been phenomenal and is now

currently trading currency to the tune of $1.6 trillion a day, having grown 50% in the last decade from an already large $1.0 trillion a day in 1992. It reached a high level in 2001 with approximately $2.2 trillion but adjusted back to the current $1.6 trillion by 2003. This was likely due to the birth of the single Euro currency in place of the then existing 12 European currencies. The Traded Currencies The six major currencies of Forex dominate the overall market share. 76% of all trades have both currencies in the currency pair as a major, and more than 98% of all trades involve at least one major. The most common currency pairs are EUR/USD (30%), USD/JPY (20%), GBP/USD (11%), and USD/CHF (5%), which together totals 66% (two-thirds) of all Forex spot trades. The Dollar, Euro, Yen, and Pound are the most traded currencies. The six majors combine for a huge bulk of the trading transactions in a single day. Corporations and banks have known this for years, and have often used Forex for hedging purposes. With the increase in global trade, multinational corporations have likewise used the forex market to manage their risk in changes in currency rates. Market share The largest part of the largest financial market in the world consists overwhelmingly of speculation, in the form of spot forex trades (95%). The remaining 5% consists of companies swapping currencies back to their home currency to repatriate profits, forwards moves, and all other transactions. Last Tip Dealer and Broker Dealer is an individual or firm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the positioning a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

Forex Market Participants (in detail) To understand the forex market, we need to understand the following market participants and their motivations: 1. Banks 2. Reserve banks 3. Hedge funds 4. Individual traders 5. Brokers 1) Banks Banks comprise a large portion of the total turnover. They use the foreign exchange market to buy and sell currencies that are needed for foreign exchange for their customers, to hedge or protect against market movements on behalf of their customers (for example when an importer may wish to protect against adverse currency movements) as well as for trading purposes. 2) Reserve banks These are government owned organizations that are responsible for managing the economy of their countries by setting interest rates and they also may take positions on foreign exchange in an attempt to regulate or smooth exchange rates. Examples include the Bank of England, the Bank of Japan, the Federal Reserve and the Reserve Bank of Australia. For example, the Bank of Japan may enter the market to sell Japanese Yen and buy Euros if they

believe that Japanese Yen are priced too high relative to Euros. Reserve banks are typically active in their own currency. They may make enormous trades that can quickly result in significant short term market movements. Usually the actions of reserve banks can be seen when there are sudden spikes or dips in a currency. In addition, reserve banks often manage the release of key economic statistics. This information is eagerly awaited by market participants and results in immediate price movements if the statistics differs from the consensus view. 3) Hedge funds Hedge funds are professional investment firms that usually manage funds on behalf of high net worth investors. They may invest in a variety of financial instruments, including foreign currencies. Their motivation is speculative profit for their investors, as they earn their money from a percentage of profits earned. 4) Individual traders Individual traders are increasingly active in the FX markets. This is driven by the ready access to the market through the Internet and the opportunities available to earn significant profits with a relatively low capital investment. Individual traders are often unsuccessful. In fact, about 90% of individual traders lose money during their time in the FX markets. Individual traders often don’t have systems, and don’t manage risk well. In addition, individual traders face higher transaction costs than professional traders as they don’t have direct access to the market and have to use a broker. Also, individual traders can’t watch the market all the time as they usually have other commitments such as work or family life. These factors are a disadvantage, but the advantage is that the individual trader can choose whether to participate in the market at any given point in time. Professional traders are pretty much obliged to trade all the time by the nature of their jobs which means that they may not be able to be as selective about the trades that they enter. 5) Brokers Brokers provide access to the FX market to individual traders. Typically banks and hedge funds have direct access to the market as they are a part of the market. A broker will provide account keeping services, execute trades and usually provides some software to place orders and allow you to look at current prices and charts. Brokers earn their profit by charging a spread. This is a difference between the buying and selling price. For example to buy EUR/USD, the price may be quoted 15/19, which means that the broker makes a spread of 4 basis points per trade. A trade is either buying or selling a foreign currency position.

Forex Instruments Spot A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar and the Mexican Nuevo Peso, which settle the next day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The spot market or cash market is a commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective. Spot markets can operate wherever the infrastructure exists to conduct the transaction. The spot market for most securities exists

primarily on the Internet. Spot transactions has the second largest turnover by volume after Swap transactions among all FX transactions in the Global FX market. Forward One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a one day, a few days, months or years. A forward contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders, where the time of trade is not the time where the securities themselves are exchanged. The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party. This process is used in financial operations to hedge risk, as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. A closely related contract is a futures contract and they differ in certain respects. Future Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. A currency future, also FX future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then a certain amount of other currency, for instance €125,000. Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date. Swap The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A forex swap consists of two legs: 1. a spot foreign exchange transaction, and 2. a forward foreign exchange transaction. These two legs are executed simultaneously for the same quantity, and therefore offset each other. It is also common to trade forward-forward, where both transactions are for (different) forward dates. The most common use of FX swaps is for institutions to fund their foreign exchange balances. Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close

out any foreign balances and re-institute them for the following day. To do this they typically use tom-next swaps, buying (selling) a foreign amount settling tomorrow, and selling (buying) it back settling the day after. The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades. Option A foreign exchange option (commonly called FX option) or currency option is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Currency Options have gained acceptance as invaluable tools in managing foreign exchange risk. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates. The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts. Naturally the option owner exercises this right when it is to his/her advantage. Currency options specify a foreign exchange contract and give the owner the right to enter into the specified contract during a pre-agreed period of time. Example: Assume that an investor believes that the USD/EUR rate is going to increase from 0.80 to 0.90 (meaning that it will become more expensive for a European investor to buy U.S dollars). In this case, the investor would want to buy a call option on USD/EUR so that he or she could stand to gain from an increase in the exchange rate (or the USD rise).

Most Commonly Used Forex Orders Depending on the forex broker you use to trade, there may be a slight variation of the order types you can use, but the basics are the same. They all have Market Orders, Limit Orders, Stop Losses etc. There are some additional automated orders that can be triggered at pre-set exchange rates and that can be positioned to control the downside and consolidate the upside. Investor should be familiarized with the various types of Forex orders, so they can protect them and assure more profits in the long run. Let us discuss some of the most commonly used forex orders: Market Order – It is an order where you can buy or sell a currency pair at the market price the second that the order is processed. Customers utilizing online currency trading platform click on the buy or sell button after having specified their deal size. The execution of the order is instant; this means that the price assured at the exact time of the click will be given to the customer. Setting a market order by phone is quite similar but normally takes a few seconds more time. Entry order – It is an order where you can buy or sell a currency pair when it attains a certain price target. In theory, this can be any price. You can set an entry order for the low price of a time period or the high price of a time period. Stop Order - An order that becomes a market order when a specific price level is achieved and broken. A stop order is placed below the current market value of that currency. The main difference between a limit order and a stop order is that stop orders are ordinarily used to

limit loss potential on a transaction while limit orders are used to enter the market, add to a pre-existing situation and profit taking. The same variants are used to specify duration as in limit orders (GTC and GFD). Limit Order - An order that turns into a market order when a specific price level is reached. An order to buy or to sell at a specified price. A buy limit order can only be executed at the limit price or lower (better), and a sell limit order can only be executed at the limit price or higher (better). A limit order is placed above the current market value of that currency. A limit order can also be said as an order placed to buy or sell at a certain price. The order basically contains two variables, price and duration. The trader defines the price at which he likes to buy/sell a certain currency pair and also specifies the duration that the order should remain active. OCO Order – An order placed so as to take advantage of price movement, which comprises of both a Stop and a Limit price. Once one level is achieved, one half of the order will be executed (either Stop or Limit) and the left order canceled (either Stop or Limit). This type of order would lock your position if the market moved to either the stop rate or the limit rate, thereby closing your trade, and, at the same time, canceling the other entry order. If Done Order – If Done Orders are subsidiary orders whose placement in the market is contingent upon the execution of the order to which it is associated. The If-done order is a kind of orders regarding to combination. It is made by two steps of limit orders or stop loss orders. The first one is filled, the other would work well. In other words, the second order does not go valid unless the first one is executed. You need to pay attention that the If-done order is quite different from the OCO order. Position order - Position orders are directly related to individual positions. These orders are only active for as long as the position stays open and can be a stop loss or limit order. Stop Loss order - A stop loss order is an order type whereby an open position is automatically liquidated at a specific price. It can also be said as an order that becomes a market order if and when a security sells at or below the specified stop price. It is used to defend oneself against a potential downward slide in a security. It is often used to minimize exposure to losses if the market goes against an investor’s position. If someone wants to learn forex, stop loss order is quite important. Stop Market - Buy or sell at market once the price reaches or passes through a specified price. Used by traders who either have a position (long or short) and want to close the position if it moves against them OR by traders who wish to open a new position once the currency rises to a specific level. The stop price on a sell stop must be below the current bid. The stop price on a buy stop must be above the current offer. Stop orders do not guarantee you an execution at or near the stop price. Once triggered, the order competes with other incoming market orders. Example: This order type is used mostly for protection. If we are long the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trading strategy used). So we would enter a sell stop market order with a stop price of 1.1878.

Stop Limit -Works like a Stop Market order with one major exception. Once the order is activated (by the currency trading at or through the stop price), it does not become a market order. Instead, it becomes a limit order with a specified limit price. The advantage of this order is that you set a specified price at which your order can be filled. The disadvantage is that your order may not be filled. In this case, your exposure to loss will continue until the position is closed. Example: This order type is used mostly for protection. If we are long the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trade strategy used). However, we do not want to be filled via a market order, but rather be filled at a price we specify or better. In this case, we would choose the stop limit order type. You are prompted to enter your stop price and to enter a limit price. So if you set your stop price at 1.1880 with a limit to sell at 1.1878 then you would sell at your price of 1.1878 or better (higher than your limit) if executed.

Types of Forex Accounts: There are different types of foreign exchange accounts and most traders keep two or more accounts while trading. These accounts are basically categorized according to how much capital a broker can invest. Generally there are three types of Forex accounts namely: 1. Mini account which is ideal for beginners who have an initial capital of less than $10,000. Basically, one is allowed to engage in Forex with just $250. Mini account can be a good starting point which can build up the confidence of new and less experienced traders in the market. With just a small capital, one should not expect a high profit; nevertheless your money is subject to low risks of loss.This type of account is also called "Mini Forex". Mini forex trading is an excellent way for small investors to learn about and take part in forex trading 2. Standard account which requires a trader an initial investment of $2,000. 3. Premium accounts with significant amounts of capital required. These accounts can have different trading services and tools for innovation. With the presence of these kinds of accounts, it is worth pointing out that a good managed Forex account can do miracles in trading. A trader can gain much by choosing a managed account backed up with good track records. Aside from these facts, certain benefits are worth mentioning such as: • Managed Forex accounts can let a trader participate in trading market without the hassle of monitoring it 24 hours. • Managed accounts are handled by professionals • There are managed accounts that are not attached to the stock market, thus assets can be more diversified. • Greater profit maximization can be possible in both falling and rising markets. • Assets are liquid and can be withdrawn regularly • Monthly reports of account are accessible and there is a real time management of account. Choosing a right account and investing in it poses a risk. It is important therefore to know what steps are to take in order to minimize. Here are the few things to remember when opening a Forex account:

1. In signing up for an account, identification is necessary; this is required by the Federal Law to avoid fraud. A trader will be asked to sign a margin agreement. Prepare the necessary documents and read the agreements thoroughly to avoid confusions. 2. Try the practice or demo account to learn the basics of trading. There are brokers who impulsively leap into trading and quickly lose their money. Take your time and learn how the trading process works. 3. Avoid being emotional while in a trade. Traders should stick to their decisions and not let their emotions control them. Foreign exchange can be considered as the biggest and most interesting market in the world. Certain individuals, even inexperienced ones get hooked on trading it. Before opening a Forex account, it is but necessary to be knowledgeable in all the aspects involved in trading.

Forex Market VS Stocks Market Foreign currency exchange (Forex) market and stocks market work quite differently. Neither Forex market nor stock market is greater than each other but the investing concept in them differs quite a lot. 1. Most investors in Forex market aim for a short-term deal. Individual Forex traders are normally trading Forex on a day-trade basis. Forex day-traders normally take small daily profits (averaging 10~30 pips), entering and exiting the market in the same day. Professional Forex traders normally will implement their own trading system in order to partially automate their day-trade process. While day-traders do exist in stock market, majority of the stock traders are more interested in doing long-term trade nevertheless. Trades in stock exchange might last for months or years where traders will get the profit in one lump sum. 2. Due to various limitations in stock markets (for example, restrictions on short selling), stock market trading depends a lot on the market trends. There are few stock traders who manage to gain in down trend market. On the other hand, Forex market offers equal earning potential regardless on the rise or fall of a country currency. There is no structural bias to the market and there are no restrictions on short selling in FX market. Trades in Forex are always done in pairs; rise or fall of a country currency will only affect its relative value compare to other currency and will not affect the chances of profit in the trades. 3. Forex brokers offer trade margin of 50, 100, 150, or even 200 to 1 of trade margin. Forex traders often find themselves controlling a huge sum of money with little cash outlay on the table. For example, a $1,000 in a 150:1 Forex account will gives you the purchase power of $150,000 in the currency market. In contrasts, stockbrokers do not offer such kind of high leverage to their clients. The max you can get when trading in stocks might only be 2:1. 4. One of the advantages in Forex trading is that you can start small always by investing in foreign currencies for as little as a $300 deposit with mini contracts. The smaller trade size enables you to take smaller risks and this is especially handful for beginners who wish to gain their trade experience in FX market. However, this benefit is not available with stock trading. Most stock brokerages do not allow you to invest in odd lots, but only in blocks of 100 shares at a time. With many stocks valued at between $20 and $500, which can mean an investment of $2,000 to $50,000 or more. 5. There are thousands of stocks to choose from stocks exchange market but major traded currency in Forex is only seven. You work less by analyzing fewer accounts in Forex trading.

Further more, countries are often more stable than companies and it's easier to predict their overall economic direction. These characteristics of Forex market reduce the hassle of selecting and filtering potential accounts. 6. Forex market and stocks exchange market structure differs a lot. Stocks are traded in a centralized market. Forex market is an over-the-counter market where there is no centralized market place for Forex trading. 7. Stock trading requires buyer and seller to ‘meet’ at a centralized market to do the exchange (for example, NYSE). Meaning that, all stock exchanges all traders’ orders are put through same dealer and pass through a single clearing firm. Stock traders will get same price on stock worldwide. On the other hand, Forex trades can be done via different brokerage agents or dealers. Each agents/ dealer has the ability and the authority to execute trades independently of each other. This structure is inherently competitive as traders are faced with a choice between varieties of firms with an equal ability to execute their trades. Currency dealers are in competition with each other, thus currency market price remain transparent and the spreads are kept tight all the time. This will then give a better market for individual Forex traders to profit from.

Foreign Exchange Market in India Introduction: The foreign exchange market in India is growing in both volume and depth. Various kinds of transactions are facilitated by the banks both on a spot and on a forward basis. Foreign and Indian banks also assist in offshore loan syndication. Other services provided include, financing of foreign trade, arranging the most economical source of supplier credit, etc. Banks also assist in foreign exchange management such as currency management strategies and designing, assessing of liability structures namely swaps, interest rates, income, etc Foreign Exchange Markets in India – a brief history The foreign exchange market in India started almost three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. RBI took an important step in that year to allow banks to undertake intra-day trading in foreign exchange. During the period 1975-1992, the exchange rate of rupee was officially determined by the RBI and there were significant restrictions on the current account transactions. The liberalization process, which started in 1991, has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies. The unification of the exchange rate of the rupee marks the beginning of the era of market determined exchange rate regime of rupee, based on demand and supply in the forex market. It is also an important step in the progress towards current account convertibility, which was finally achieved in August 1994 by accepting Article VIII of the Articles of Agreement of the International Monetary Fund. The appointment of an Expert Group on Foreign Exchange (popularly known as Sodhani Committee) in November 1994 is a landmark in the design of foreign exchange market in India. It recommended greater freedom to participating banks, allowing them to fix their own trading limits, interest rates on FCNR (Foreign Currency Non-Resident) deposits and the use of derivative products. The Group studied the market in great detail and came up with far reaching recommendations to develop, deepen and widen the forex market. In the process of development of forex markets, banks have been accorded significant initiative and freedom to operate in the market. To quote a few important measures relating to market development and liberalization banks were allowed freedom to fix their trading limits, permitted to borrow and invest funds in the overseas markets up to specified limits, accorded freedom to determine interest rates on FCNR deposits within ceilings and allowed to use derivative products for asset-liability management purposes. Similarly, corporates were given flexibility to book forward cover based on past turnover and allowed to use a variety of instruments like interest rates and currency

swaps, caps/collars and forward rate agreements in the international forex market. Rupee-foreign currency swap market for hedging longer -term exposure has developed substantially in the last few years. Today over 70% of the trading in foreign exchange continues to take place in the inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks) who transact currency among themselves. Trading is regulated mainly by 2 – 1. Foreign Exchange Dealers Association of India (FEDAI) - a self regulatory association of dealers. 2. Clearing Corporation of India Limited (CCIL) – which takes care of clearing and settlement functions in the foreign exchange market, approximately 3.5 billion US dollars a day, about 80% of the total transactions. In 2004, as per survey conducted by BIS (Bank for International Settlements), the Indian Rupee featured in the 20th position among all currencies in terms of being on one side of all foreign transactions around the globe, and ranked 23rd among all countries in terms of turnover. In April 2008, in order to facilitate the market participants in managing the exchange rate volatility, the joint working committee of RBI and SEBI (Securities and Exchange Board of India) finalized the guidelines for exchange-traded Currency Futures. Based on the guidelines, RBI framed the directives on currency futures trading on recognized stock exchanges and new exchanges. India’s biggest stock exchange, National Stock Exchange of India, started trading in currency futures on August 6th, 2008. Currency Futures trading already proved to be a success within this short time period. Intervention of Government in Foreign Exchange Markets Since the value of a country’s currency has significant bearing on its economy, foreign exchange markets frequently witness government intervention in one form or another, to maintain the value of a currency at or near its desired level. Interventions can range from quantitative restrictions on trade and cross-border transfer of capital to periodic trades by the central bank of the country or its allies and agents so as to move the exchange rate in the desired direction. It is safe to say that over the years since liberalization, India has allowed restricted capital mobility and followed a “managed float” type exchange rate policy. Officially speaking, India moved from a fixed exchange rate regime to “market determined” exchange rate system in 1993, which has got more “volatility” in exchange rates without targeting any specific levels and which has been hard to do in practice. The Reserve Bank of India has used a varied mix of techniques in intervening in the foreign exchange market – indirect measures such as press statements (sometimes called “open mouth operations” in central bank speak) and, in more extreme situations, monetary measures to affect the value of the rupee as well as direct purchase and sale in the foreign exchange market using spot, forward and swap transactions. Current Status: The rupee breached the psychological Rs.50 level in November 2008 and has been under sustained pressure against the greenback that initiated the Reserve Bank of India (RBI) to sell dollars to resist the fall in domestic currency. Indian Rupee depreciated 12.58 percent between September 2008 and January 2009. From a peak of $315.6 billion in June 2008, India’s forex reserves dropped to $248.6 billion in January 2009.

Role of CCIL in Indian FX Market The Clearing Corporation of India Ltd. (CCIL) was set up in April, 2001 for providing

exclusive clearing and settlement for transactions in Money, Govt. Secs and Foreign Exchange. The prime objective has been to improve efficiency in the transaction settlement process, insulate the financial system from shocks emanating from operations related issues, and to undertake other related activities that would help to broaden and deepen the money, debt and forex markets in the country. A brief history The company commenced operations on February 15, 2002 when the Negotiated Dealing System (NDS) of RBI went live. CCIL started providing the settlement of forex transactions since November 2002. CCIL launched the Collateralised Borrowing and Lending Obligation (CBLO) in January 2003, a money market product based on Gilts as collaterals. It has developed a forex trading platform called “FX-CLEAR” which went live on August 7, 2003. CCIL has started the settlement of cross-currency deals through the CLS Bank from April 6, 2005. At the request of RBI, CCIL developed and currently manages the NDS-OM (Order Matching) and NDS-CALL electronic trading platforms for trading in the government securities and call money. It has also developed the NDS-Auction module for Treasury Bills auction by RBI. CCIL has received the ISO/IEC 27001:2005 certification from M/s Det Norsk Veritas in 2006 for securing its information assets. CCIL has introduced many innovative products/tools like ZCYC (Zero Coupon Yield Curve), Bond and T-Bills indices, Sovereign Yield Curve, Benchmark reference rates like CCILMIBOR/MIBID and CCBOR/CCBID, etc. CCIL regularly comes out with many publications for the benefit of the market participants. Who can become a member of CCIL – Forex Segment? All Authorized Dealers in Foreign Exchange, as licensed by Reserve Bank of India, and maintaining a Current Account with Reserve Bank of India, Mumbai are eligible to seek membership to CCIL’s Forex Segment, provided they are members of RBI INFINET (INdian FInancial NETwork). Benefits By choosing to settle their trades through CCIL, market participants will gain in the following ways: Assurance of settlement on the settlement date Reduction in counterparty exposure. In case of government securities, the exposure will get extinguished upon acceptance of trades for settlement; in forex clearing & settlement, since a Loss Allocation Procedure is stipulated, the exposure will not get extinguished but will come down from the gross level to the net level. Operational efficiency Easier reconciliation of accounts (in case of forex trades) Improved liquidity and better leveraging (e.g., shorter holding periods for government securities) Lower operational cost, overall Settlement Procedures CCIL commenced settlement of forex operations from 08th November, 2002 covering interbank USD/INR spot and forward trades. From February, 5 2004 cash and Tom trades were included for guaranteed settlement. The netting scheme adopted by CCIL is netting by

substitution. The netting scheme adopted by CCIL is netting by novation where the bilateral relationship between the two participants/members is substituted with bilateral contracts between each participant/member and CCIL. The multilateral netting system provides a netting benefit of over 85%. Every eligible foreign exchange contract, entered into between members, will get substituted and be replaced by two new contracts - between CCIL and each of the two parties, respectively. Deal confirmation files will be transmitted over the INFINET to CCIL, and will form the starting point for processing by it. Following the multilateral netting procedure, the net amount payable to, or receivable from, CCIL in each currency will be arrived at, member-wise. The Rupee leg will be settled through the members' current accounts with RBI and the USD leg through CCIL's account with the Settlement Bank at New York. Details of eligible trades done are received from members in a prescribed format. The trades are validated and matched. Matched trades are subjected to an exposure check and trades that pass such exposure check are ‘Accepted’ for settlement. The matched Forward deals are guaranteed for settlement from S-2 day and Cash, Tom, Spot deals are guaranteed for settlement from trade date. Various reports are generated to update members on the status of deals reported by it to CCIL and the net settlement obligations that become due to and from them. These reports are accessed by members over a Report Browser on their INFINET network. FX- Clear CCIL has developed FX-CLEAR, a Forex Dealing System, which has been launched on August 7, 2003. FX-CLEAR offers both Order Matching and Negotiation Modes for dealing. The FXCLEAR covers the inter-bank US Dollar-Indian Rupee (USD- INR) Spot and Swap transactions and transactions in major cross currencies (EUR/USD, USD/JPY, GBP/USD etc.) The USDINR constitutes about 85% of the transactions of the total Forex transactions in India in terms of value. To sum up, as a central counterparty for foreign exchange, government securities and repos in India, CCIL plays a critical role in this fast-growing market.

Foreign Exchange Dealer's Association of India (FEDAI) was set up in 1958 as an Association of banks dealing in foreign exchange in India (typically called Authorised Dealers - ADs) as a self regulatory body and is incorporated under Section 25 of The Companies Act, 1956. Its major activities include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis-à-vis public and liaison with RBI for reforms and development of forex market. Functions of FEDAI: Presently some of the functions are as follows: 1.Guidelines and Rules for Forex Business. 2.Training of Bank Personnel in the areas of Foreign Exchange Business.

3.Accreditation of Forex Brokers 4.Advising/Assisting member banks in settling issues/matters in their dealings. 5.Represent member banks on Government/Reserve Bank of India/Other Bodies. 6.Announcement of daily and periodical rates to member banks. Role of FEDAI: Due to continuing integration of the global financial markets and increased pace of de-regulation, the role of self-regulatory organizations like FEDAI has also transformed. In such an environment, FEDAI plays a catalytic role for smooth functioning of the markets through closer co-ordination with the RBI, other organizations like FIMMDA (Fixed Income Money Market and Derivatives Association), the Forex Association of India and various market participants. FEDAI also maximizes the benefits derived from synergies of member banks through innovation in areas like new customized products, bench marking against international standards on accounting, market practices, risk management systems, etc. FEMA and FEDAI: Due to the continuous process of rationalisation and simplification of procedures and various measures of liberalisation being announced by RBI from time to time, the provisions of the Foreign Exchange Management Act, 1999 have also undergone critical changes in the recent past. FEDAI has taken the initiative of bringing out an updated Second Edition of the Regulatory Requirements under FEMA, 1999 within two years of its first publication, to provide the member banks with a handy reference book. Regulatory Requirements under FEMA current as on 15th October 2004 (with updates up to 31st December 2004) have been presented comprehensively trusting that this will serve the purpose it is intended for. Member Banks: Public Sector Banks (27) 2. Foreign Banks (29) – including Deutsche Bank A.G 3. Private Sector Banks / Co-Operative Banks (26) 4. Financial Institutions / Others (5)

Total Members (as of September 2007): 87 Managing Committee Members: Managing Committee for the Year 2007 – 08 Chairman - State Bank of India Vice Chairman - Citibank N A Additional Vice Chairman - The Federal Bank Limited

Members - Allahabad Bank, AXIS Bank Limited, Bank of America, Bank of Baroda, BNP Paribas, Canara Bank, Corporation Bank, Deutsche Bank A.G., HSBC, HDFC Bank, ICICI Bank. IDBI, Syndicate Bank, Union Bank of India, UCO Bank, Vijaya Bank, Syndicate Bank… etc FEDAI Local Committees: Centre

Chairman

Managing Committee Members

Bangalore

C/o. Canara Bank

Canara Bank... Chairman

Head Office

State Bank of Mysore.. Vice Chairman

P.B. No.6648

Bank of India .. Member

112, J C Road

Vijaya Bank

Bangalore - 560 002

UCO Bank Bank Muscat ING Vysya Bank ICICI Bank Limited State Bank of India

Kolkata – United Bank of India... Chairman, Allahabad Bank .. Vice Chairman Kochi - State Bank of Travancore... Chairman Chennai - Indian Overseas Bank... Chairman, Indian Bank... Vice Chairman New Delhi - Punjab National Bank... Chairman, Oriental Bank of Commerce... Vice Chairman Jaipur - State Bank of Bikaner and Jaipur... Chairman, State Bank of India... Vice Chairman Definition of Dealer An individual or firm acting as a principal, rather than as an agent, in the purchase and/or sale of currencies. Dealers trade for their own account and risk. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

10 Tips for your success in Forex trading 1. Implement a trading plan “If you fail to plan, you plan to fail”. A trading plan is especially crucial in Forex trading to stay ‘in-control’ against the emotional stress in speculative situation. Often, your emotions will blind and lead you to the negative sides: greed causes you to over-ride on a win while fear causes you to cut short in your profits. Hence, a well organized operation has to be predetermined and strictly followed. 2. Trade within your means

If you cannot afford to lose, you cannot afford to win. Losing is a not a must but it is the natural in any trading market. Trading should be always done using excess money in your savings. Before you start to trade in Forex, we suggest you to put aside some of your income to set up your own investment funds and trade only using that funds. 3. Avoid emotion trading If you do not have a trading plan, make one. If you have a trading plan, follows it strictly! Never ever attempt to hold your weakened position and hope the market will turn back in your favor direction. You might end up losing all your capital if you keep holding. Move on, stay within your trading plan, and admit your mistakes if things do not turn as you want. 4. Ride on a win and cut your losses Forex trader should always ride till the market turns around whenever a profit is show; while during losing, never hesitate to admit your mistakes and exit the market. It is human nature to stay long on loses and satisfy with small profits – this is why as we mentioned earlier that a strictly followed trading plan is a must-have. 5. Love the trends Trends are your friends. Although currency values fluctuate but from the big picture it normally goes in a steady direction. If you are not sure on certain moves, the long term trend is always your primary reference. In long run, trading with the trends improves your odds in the Forex market. 6. Stop looking for leading indicators There aren't any in the Forex market. While some firms make a lot of money selling software that predicts the future, the reality is that if those products really worked, they wouldn't be giving the secret away. 7. Avoid trading in a thin market Trade on popular currency pairs and avoid thin market. The lack of public participation will cause difficulties in liquidate your positions. If you are beginners, we suggest the big five: USD/EUR, USD/JPY, USD/GBD, USD/CHF, and EUR/JPY. 8. Avoid trading in too many markets Do not confuse yourself by overtrading in too many markets especially if you are a beginner. Go for the major currency pairs and drill down your studies in it. 9. Implement a proper trading system There is hundreds of trading systems available on line. Pick one that you are most comfortable with and stick with it. Stay organized in your trades and fully utilized stop-loss or limit functions in your trades. 10. Keep learning The best investment is always the investment on your brain. Without a doubt, Forex trading needs much more than just a few guidelines or tips to be successful. Experience, knowledge, capital, fortitude, and even some help of luck are all crucial in one’s success in the FX market. if you lose in a trade, do not lose the experience in it. Learn from your mistakes and regain your position in the next trade. FOREX Trade in brief The Foreign Exchange Market, or Forex market is a worldwide market where buying and selling of currencies takes place. These transactions take place 5 days a week, 24 hours a day and daily are worth approximately 1.5 trillion dollars (US). The Forex market opened in 1971 when the fixed currency exchanges market was closed. Thanks to the technology now available this market has grown from trading 70 billion dollars (US) a day to the current level. There are approximately 5,000 institutions in Forex. Some are banks, some commercial

companies and some foreign currency brokers. The largest Forex trading centers are located in New York, London, Tokyo, Hong Kong, Paris, Frankfurt, Singapore and Paris. As mentioned above, technology has produced a boom in the Forex market. With the advent of online investing even small investors can take advantage of the Forex market. Over the years many regulations have changed allowing smaller transactions to take place. There are no longer minimum transaction sizes. Some of the advantages to Forex are: Brokers earn money by setting the spread, they do not work on a commission basis. The spread is known as the difference between what a currency can be bought for and sold at. The market is open, as mentioned above, 24 hours a day, 5 days a week and is available to you at the push of a button over the internet. The Forex market is a huge one and with bids and ask offers and the high number of transactions taking place on a daily basis the market remains liquid. This means there is always a buyer and a seller for any currency type. Because there are always movements between currencies even small changes can result in profits for investors. This is due to the fact that the market is broken down into what are called lots. Each lot is worth approximately 100 thousand dollars (US). Individuals can invest through what are called leverage loans. Generally a $1,000.00 investment can get you started.

Risks in Forex Market How high are the risks in Forex trading? The risks of losing money in Forex trading are high, but it is controllable via proper education and trading system. Trading system is a must in Forex trading. Charts, graphs, or pivot points are handful to indicate the right time to enter or exit the market. An 'automated system', such as make you easier as in any trade market, discipline, control of emotion, and money management are the traits needed to be succeed in Forex trading. Rewards in Forex trading can be very lucrative if traders manage their risk nicely. One benefit to using the recommended brokerage firm is that they guarantee fills at your Limit and Stop-Loss order prices with no slippage. This means you can have total control over the amount you risk on each trade. But remember, FOREX Trading is speculative and any capital used should be risk capital. In fact, it is recommended that you trade on a demo account until you have shown profit for at least three consecutive months before trading real money. Risk Warning The following should be read carefully, as it describes some of the main risks in dealing in the Forex and CFD (Contract For Differences) markets. This notice cannot and does not disclose or explain all of the risks and other significant aspects involved in dealing in such products, but you should particularly note the following: 1. Under margin trading (When you open a new margin account with a Forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000) conditions, even small market movements may have great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy. 2. Some instruments trade within wide intraday ranges with volatile price movements. Therefore, you must carefully consider that there is a high risk of losses as well as profits. Understanding the risks involved

1. It is important that the Customer should not engage in trading unless he/she understands the nature of the transaction he/she is entering into and, the true extent of the exposure to the risk of loss. 2. These products may not be suitable for all investors; therefore if the Customer does not fully understand the risks involved, he / she must seek independent advice. Last Tip: Who are the major players in Forex trading? According to Wall Street Journal Europe, 73% of the trade volume is covered by the major ten. Deutsche Bank, topping the table, had covered 17% of the total currency trades; followed by UBS in the second and Citi Group in third; taking 12.5% and 7.5% of the market. Other large financial corporation in the list is HSBC, Barclays, Merril Lynch, J. P. Morgan Chase, Coldman Sachs, ABN Amro, and Morgan Stanley.

How to avoid Forex Risks? To trade, or not to trade in Forex?. Many are reluctant to involve in Forex trading because of its ‘risks. Generally speaking, there are risks everywhere in our life. The Forex market behaves differently from other markets. The speed, volatility, and enormous size of the Forex market are unlike anything else in the financial world. Forex market is uncontrollable - no single event, individual, or factor rules it. Enjoy trading in the perfect market. Just like any other speculative business, increased risk entails chances for a higher profit/loss. Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to any or all other currencies in a matter of days, hours, or sometimes, in minutes. This unpredictable nature of the currencies is what attracts an investor to trade and invest in the currency market. But we need to ask ourselves, "How much are we ready to lose?" When we terminated, closed or exited our position. We have to understand the risks and take steps to avoid them. Let's look at some foreign exchange risk management issues that may come up in your day-to-day foreign exchange transactions. 1. Unexpected corrections in currency exchange rates 2. Wide variations in foreign exchange rates 3. Volatile markets offering profit opportunities 4. Lost payments 5. Delayed confirmation of payments and receivables 6. Divergence between bank drafts received and the contract price These are areas that every trader should cover both BEFORE and DURING a trade. There are risks everywhere! The important issue here is how you learn and maintain your risk. So if you are considering participating in Forex market, you should learn managing the risk involved, instead of being terrified. Methods to avoid risks 1. Picking up the right Forex dealer One of the best methods to avoid unnecessary risks is avoid fraud dealer. Forex is a special trading business with no centralized market. Thus, unlike regulated futures exchanges, there is no

central market place for Forex buyers or sellers therefore the price offered by different Forex dealers may vary a lot. When you are trading in Forex market, you are totally relying on the dealer’s integrity for a fair deal. Furthermore, you need to select a right Forex dealer to avoid scams. There may be Forex dealers that are not regulated legally and there maybe investment scams, especially on the Internet. Be very careful on who you are dealing with in Forex and always check cautiously on the investment offer. 2. Stop loss order The Forex market could move against you. No one can predict with certainty which way exchange rates will go, and the Forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your Forex contract and the potential profit and losses relating to it. To avoid losing all of your investment capital, you should have a pre-arrangement on your risk profile. A solid risk profile will limit the Forex dealer not to overtake risk that you cannot handle. For example, if you have 100,000 to invest, you can say that you are willing to risk 10,000 of that capital with the potential to gain another 100,000. This can be easily implemented by a fund manager, so your losses can be limited to 10% or 5% of invested capital. 3. Avoid too high margin trade Another way to manage your risks well in Forex market is to trade without overleveraged. Forex dealers want you to trade with high leverage values as this means more spread income for them. Also, trading in high leverage may increase your profit or your losing. There are high possibilities that one loses money more than he/she can afford in margin trading. Forex can be extraordinarily beneficial to a variety of people. It gives huge leverage rates, it gives incompatible liquidity to your money, it gives convenience to trade on the Internet, and it can definitely give you a lot of money if you trade smartly. 4.

A Forex Demo Account and Great Forex Currency E-books

Like any other trading business, if you are new to it, best advice you can get is to learn and practice more before you test your ‘wings’. Seminars, eBooks, Internet, papers, video courses – all these are handy to get yourself ready. You can also try out your skill on the demo account provided free, where you are given play chips. You will have a chance to earn "play money" but if you deposited real money you would be earning real money. Almost every single online Forex trading site offers you this chance. This gives you the perfect "hands on" opportunity to try out your skills and experience following the Forex e-books, Forex Trading courses you could buy. After all, Forex trades 24hours a day and there is always money to make in the market, so have patience until you are fully ready for it. 5. Diversification in Forex trading Diversification is another way to manage risks in Forex market. Trading one currency pair will generate few entry signals. If you wish to lower your risk in Forex market, it would be better to diversify your trades between several currencies. Try simultaneously trade on different pair of currency. Say you have capital of $1,000, instead of putting all your money to long EUR/USD, you can split the money half to long EUR/USD and GBD/USD ($500 each) as these two currencies are highly correlated and tends to move in the same directions. Conclusion Needless to say, knowledge is another key of handling your risks well. Before you get into Forex market, the best thing you should do is educate yourself. To be frank, Forex can be very profitable but the risk lie beneath is equally great. But what else in life does not involve risk? Learning in risk management is the key to handle your life.

Buying and Selling in Forex Market Foreign Exchange is the buying or selling of one currency against another currency. All

trades result in the buying of one currency and the selling of another, simultaneously. In forex trading, you place an order to buy (go long) or sell (go short) the first currency in a currency pair at current exchange rates. In forex trading, “long” means buying and “short” means selling.

Buying Buying a currency pair implies buying (longing) the first (base*) currency and selling (shorting) an equivalent amount of the second (quote**) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros (EUR) using US Dollars (USD). It is not necessary for the trader to own the quoted currency prior to selling, as it is sold short. A speculator buys a currency pair if he/she believes the exchange rate*** for the base currency will go up relative to that for the quote currency (that is, the value of the pair will go up).

Selling Selling the currency pair implies selling (shorting) the first (base) currency and buying (longing) an equivalent amount of the second (quote) currency to buy the base currency. For example, selling EUR/USD means that you are buying US Dollars (USD) using Euros (EUR). A speculator sells a currency pair if she believes the base currency will go down relative to the quote currency, or equivalently, that the quote currency will go up relative to the base currency.

Placing an Order When you request to buy or sell a currency pair, you place an order (also called "opening a trade" so that you take a position****) based on the exchange rate at the time. Right after you place an order, the value of the position will be closed to zero, because the value of the base currency is more or less equal to the value of the equivalent amount of the quote currency. As time goes on and exchange rates change, the value of the position will evolve to be profitable (or not). When you eventually decide to take a profit or stop a loss on the position, you "close" the trade. When you close the trade, Profit/Loss is calculated from the difference between the exchange rate at the time you opened the trade to the time you closed it. Examples ---Suppose EUR/USD = 1.5000, and you sell 10,000: Your base currency position is 10,000 EUR Your quote or counter currency position is 10,000*1.5000=15,000.00 USD ---Let's say, hypothetically, that there is political turmoil in Japan. If you believe that the Yen will depreciate as a result of this turmoil, you have the following outlook: It is a good time to be long (buy) USD It is a good time to be short (sell) JPY ---If you think the USD/CAD will move up: You are bullish on the USD You believe the USD/CAD is undervalued You want to be long USD/CAD

Definitions of Terms *Base Currency The base currency is the first currency in any currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350. In the Forex markets, the U.S. dollar is normally considered the "base" currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the Euro, and the Australian dollar. **Quote Currency

The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency. ***Exchange Rates An exchange rate refers to the number of units of one currency needed to purchase one unit of another, or the value of one currency in terms of another. Exchange rates, influenced by real world events, change constantly. Exchange rates are quoted in currency pairs. The first currency is referred to as the base currency and the second as the counter or quote currency. For example, the exchange rate quoted for the EUR/USD would tell you how many Euros (the base currency) would be needed to buy USD (the quote currency). If buying, an exchange rate specifies how much you have to pay in the quote currency to obtain one unit of the base currency. If selling, the exchange rate specifies how much you get in the counter or quote currency when selling one unit of the base currency. ****Taking a position Making a trade in FX is sometimes called “taking a position [in something]”. Cross Currency A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling a GBP/USD. Cross currency pairs frequently carry a higher transaction cost. The three most frequently traded cross rates are EUR/JPY, GBP/EUR and GBP/JPY.

Letter Code A currency exchange rate is always quoted using standard International Standards Organization (ISO) 3-letter code abbreviations. For example, USD/JPY refers to two currencies: the U.S. Dollar and the Japanese Yen. Quote Convention Exchange rates in the Forex market are expressed using the following format: Base currency / Quote currency Bid / Ask Bid and Ask Prices FX Trade Platform uses the bid/ask (bid/offer) method for quoting prices. For example, the exchange rate for EUR/USD might look like one of the following: 146.972/981 146.972 vs. 146.981 The first number is the bid price, or the rate used if you sell a currency. The next set of numbers (after the slash) shows the last few digits of the ask price if you buy a currency. Bid Price The bid is the price at which the market is prepared to buy a specific currency pair in the Forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote EUR/USD 1.2812/15, the bid price is 1.2812. This means you can sell on U.S. dollar for 1.2812 Euros.

Ask Price The ask is the price at which the market is prepared to sell a specific currency pair in the Forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation. For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one U.S. dollar for 1.2815 Euros. The ask price is also called the offer price. Spread The difference between the bid and the ask price is referred to as the spread. In the example above (EUR/USD at 146.972/981), the spread is .009 or 9 pips. A pip is the smallest unit by which a cross price quote changes. Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market. The critical characteristic of the bid/ask spread is that it is also the transaction cost for a roundturn trade. Round-turn means both a buy (or sell) trade and offsetting sell (or buy) trade of the same size in the same currency pair. In the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips. The broker makes money from the spread between the bid and the ask prices and some brokers may charge a commission as well.

Examples of Forex Quotes Confused about the forex quotes? Here are some quick examples for the beginners. Try not to look at the answer and determine the value of bid price, ask price, spread value, and the pip value. 1. EUR/USD 1.2385/1.2390 Base currency= Eur Bid price= 1.2385; Ask price= 1.2390 When selling Euros, 1 Euro = USD$1.2385; when buying Euros, USD$1.2390 = 1 Euro. Spread = | 1.2385 - 1.2390 | = 0.0005 Pip value= 0.0001 2. EUR/JPY 127.95/128.00 Base currency= Eur Bid price= 127.95; Ask price= 128.00 When selling Euros, 1 Euro = JPY127.95; when buying Euros, JPY128.00 = 1 Euro. Spread = | 127.95 - 128.00 | = 0.05 Pip value= 0.01 3. GBP/USD 1.7400/10 Base currency= GBP

Bid price= 1.7400; Ask price= 1.7410 When selling Pound, 1 Pound = USD$1.7400; when buying Pound, USD$1.7410 = 1 Pound. Spread = | 1.7400 - 1.7410 | = 0.001 Pip value= 0.0001 4. USD/JPY 119.8 Base currency= USD No bid-ask price is displayed, spread value not available. Pip value= 0.1 Spread The difference between the bid and the ask price is referred to as the spread. The broker makes money from the spread between the bid and the ask prices and some brokers may charge a commission as well. Pip A pip is the smallest value in a Forex quote. Take our example earlier on EUR/USD. If the exchange rate goes from 1.2385 to 1.2386; that's one pip. In mathematical definition, a pip means the last decimal place of a quotation.

Two way prices OR Two-sided quote Meaning Two-way prices are dual price quotations that include both an offer price and a bid price. This type of quote is commonly used in foreign exchange markets where investors engage in the buying and selling of currency. E.g: The bid/ask price for EUR/USD is quoted as 1.2320/23, meaning you can buy 1 euro with 1.2323 US dollars or sell 1 euro for 1.2320 US dollars. Banks also make use of a two-way price when calculating the current rate of exchange in order to conduct wire transfer of funds between various countries. A two-way price is also often employed with bond prices as well. Importance When it comes to Forex trading, a two-way price allows the investor to see what he or she will receive in the way of a return by purchasing or selling a particular set of currencies. The details of the proposed transaction will depend on the specific dealer who would handle the transaction, and the current rate of exchange that exists between the two currencies. Because the two-way price includes both an offer and a bid price, it is easy for the investor to determine if the proposed exchange is advantageous or should be avoided at the present time. It is important to note that the bid and offer prices associated with any given foreign exchange quote are usually slightly different. Referred to as a spread, the difference between the offer and bid price in a two-way price strategy is usually identified in terms of pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th or 1% of the current worth of the particular unit of currency. In most cases, the spread between the offer and bid prices included in the two-way price will not amount to a great deal. But the difference between the two price components can be just enough to make it possible for an investor to either lose or gain from the transaction.

Points to be noted… When quoting terms for a two-way price, there are some generally accepted procedures. Many currencies around the world are quoted based on the number of units required to equal one American dollar (E.g: USD/JPY, which quoted as 114.05/114.08). However, this is not true with most of the other major currencies in circulation. Currencies such as the Euro, the Irish punt and the British pound are often quoted in terms of how many American dollars are required to equal one unit of the currency in question (E.g: EUR/USD which is quoted as 1.2500/1.2503). To keep it in a simple way, in the Forex Markets, the U.S. dollar is normally considered the "base" currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the Euro, and the Australian dollar.

Trade Date and Value Date Trade Date: The date on which a trade occurs. This is also called the Transaction Date. Value Date: This is also called the Maturity Date.

Definitions: General: Date on which a transaction actually takes place. Accounting: Date on which allocated, budgeted, or contracted funds are paid, received, or used. Banking: (1) Date on which an account holder can use the funds from deposited checks that have passed through the bank's clearing cycle. (2) Date on which a deposit starts to earn interest. Trading: Date on which the item that was bought or sold must be delivered. For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date, (one day for Canada). The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country (ies) of the foreign currency (ies). The value date then moves forward a day. The enquirer is the party who must make sure that his spot day coincides with the one applied by the respondent. The forward months maturity must fall on the corresponding date in the relevant calendar month. If the one month date falls on a non-banking day in one of the centers then the operative date would be the next business day that is common. The adjustment of the maturity for a particular month does not affect the other maturities that will continue to fall on the original corresponding date if they meet the open day requirement. If the last spot date falls on the last business day of a month, the forward dates will match this date by also falling due on the last business day. In forward trade it corresponds to the future date indicated in the forward contract. To sum up it is date on which either the security or cash equivalent is settled on completion of a trade.

Forex Day Trading

Day trading is a way of trading that generally relates to entering and exiting trades such that all positions are closed off before the end of the trading day. As a style, it refers more to people who are willing to execute multiple trades within a relatively short period, attempting to make money off what more long-term traders would see as fluctuations. Some seasoned Forex traders prefer this method as opposed to long-term methods for various reasons. You can see the results of your efforts in shorter periods. It can be very profitable, particularly if you have a large amount of money in your account. Large institutions engage in this sort of trading quite a bit because they have millions, maybe billions in their accounts. A very small move might earn the small-time trader - only a few hundred dollars. That same “fluctuation” might earn the big traders tens of thousands of dollars or more. It means that you have many more opportunities to open positions and thus, make profits. Unfortunately, it also means you have many more opportunities to lose your money. As with all forms of trading, the trick is managing your money effectively; something that is a lot more difficult when operating in shorter time frames. One of the obstacles cited by some traders in their case against day trading is the necessity of spending more time in trading mode. This means staring at a computer screen, for most people. It can also mean listening to news, constantly browsing the information websites etc. These traders may be able to overcome the higher risks that Day Trading might entail; they just don’t have the time to do that. This is where an automated system comes in. If any of these traders could “program” his trading system into a Forex Trading Software, then that problem would be solved. In that situation, the trader no longer has to devote all that time. When there is a Buy or Sell signal, the trader can have a quick look at the markets and confirm this by opening the position. It is also possible to have the software enter and exit trades for you, hence the term “automated”. To use this, the trader would have to have complete trust in his system. Many automated systems are now available from a large variety of traders and gurus. It’s easy enough to test on a demo account. If you wish to try any of these on a live account, then you should start out using the signals, while you actually enter the trades yourself. They usually have a free trial period, so you can evaluate whether or not you are comfortable using them. That way, if it doesn’t work out, you can get your money back, or just not buy the full product. As with any of the other trading styles, techniques or whatever you might choose to call them, this one has takers and those who are against it. Some experts argue that it is simply not possible to do any meaningful analysis when operating within such a short time frame. This method of trading, in their opinion, reduces Forex Trading to something more akin to gambling. They would argue rightfully that entering and exiting a trade should not be like throwing dice. There should be a clear strategy in place. This concept is just much more complicated to implement when engaging in day trading. You are also significantly more exposed to price spikes due to news. It can be a wild ride. Adding an automated system to the mix goes even further down the road in that respect. Regardless of that, there are those who thrive on it. It’s hard to argue with facts and figures. For some people, Day Trading is Forex trading. They wouldn’t have it any other way. It’s not for everyone, but that doesn’t mean it can’t be done profitably. Ultimately, you will have to try it yourself to see how it sits with you.

Currency Valuation Meaning Keeping global trade going is imperative. It is important that we have a process whereby the value of currency issued by any given country can be compared to that of another country. This process of determining the currency exchange rate is referred to as currency valuation. Currency Valuation – Past and Present

In years past, the process of currency valuation tended to rest upon criteria such as the amount of gold bullion that is held by the treasury of a given country. Simply put, the more gold on hand, the more secure the currency was considered to be. It would be worth more when exchanged for currency issued by as country that possessed smaller reserves of gold. This criterion, often referred to as the gold standard, has not been the norm for almost a century now. Today, there are a number of other factors that influence the process of currency valuation. Today, currency valuation will involve evaluating the current rate that goods and services are exported to other countries, as well as taking into consideration the rate that goods and services are received from other countries. Factors affecting… Flow of commerce - has a direct impact on the currency valuation between any two countries. Along with using a current snapshot of the import and export rates of goods and services, there is also the indicator of how the currency of a given country is being purchased. Many entities will purchase the currency of a country at its current rate of exchange, with the expectation that it will increase in value against other currencies. This expectation, if focused on the currency of one particular country, will become a self fulfilling prophecy, at least in the short term as demand drives the currency valuation for a given country upward. Other factors - also come into play. Most notably, natural disasters can have a large impact on the currency valuation process. A country that is no longer able to export key goods and services and must for a time rely on imports to reconstruct the internal economy after a natural devastation will see the currency of the country decrease significantly in value, at least for the short term. As conditions within the country improve and the balance between imports and exports becomes of equitable, the currency valuation will once again begin to rise. Conclusion: Currency valuation is simply the way we make it possible for trade to continue on world wide basis by determining how our respective currencies will be exchanged for currencies of other countries. Without this process of currency valuation, we would not be able to enjoy a number of the products that we take for granted every day.

Why Currency Values Fluctuate? What causes the fluctuations in the currency values? Basically the fluctuations are caused by the demand and supply of the currency. The demand and supply is generally affected by a country's trade and its macro-economy policies. 1. Interest Rates When the interest rates of a country are high, investors and speculators will take advantage of the higher interest rates. Money will flow into the country. This will boost the demand for the country's currency and can cause the currency to appreciate. Interest rate has a great influence on the short term movement of capital. If interest rate in a country rises due to increase in bank rate or otherwise, there will be a flow of short term funds into the country and the exchange rate of the currency will rise. Reverse will happen in case of fall in interest rates. When the interest rate at the centre rises, it attracts short term funds from other centers. This would increase the demand for the currency at the centre and its value. Rising of interest rate may be adopted by a country due to tight money conditions or as a deliberate attempt to attract foreign investment. 2. Money Supply and Inflation An increase in money supply in the country will affect the exchange rate through causing inflation in the country. It can also affect the exchange rate directly. When central banks prints money, money supply will increase. There will be more money in circulation. Inflation goes up, the currency value becomes weaker and this causes the currency to depreciate. Inflation in the country would increase the domestic prices of the commodities. With increase in prices

exports any dwindle because the price may not be competitive. With the decrease in exports the demand for the currency would also decline, this in turn would result in the decline of external value of the currency. It may be noted that it is the relative rate of inflation in the two countries that cause changes in exchange rates. 3. Balance of Payments When a country exports more than it imports, the country is known to be in a trade surplus. Demand for its currency usually follows and this causes the currency to appreciate. Balance of payments represents the demand for and supply of foreign exchange which ultimately determine the value of the currency. Exports, both visible and invisible represent the supply side for foreign exchange. Imports, visible and invisible create demand for foreign exchange. When the balance of payments of a country is continuously at deficit, it implies that the demand for the currency of the country is lesser than its supply. Therefore its value in the market declines. If the balance of payments is surplus continuously, it shows that the demand for the currency in the exchange market is higher than its supply and therefore the currency gains in value. 4. Economic Growth When a country anticipates weakening economy, investors will cash out their investments and transfer their money to other countries with higher growth prospects. Demand for the currency falls and the currency will depreciate. This is evident in the recent financial crisis in Oct 2008. The Euro and GBP depreciated as investors cash out to buy US Treasury bonds. 5. Increase in National Income An increase in national income reflects increase in the income of the residents of the country. This increase in the income increases the demand for goods in the country. If there is under utilized production capacity in the country, this will lead to increase in production. There is a chance for growth in exports too. But more often it takes time for the production to adjust to the increased income. Where the production does not increase in sympathy with income rise, it leads to increased imports and increased supply of the currency of the country in the foreign exchange market. 6. Market Speculators Speculators will sell currencies they anticipate will weaken, and buy currencies they anticipate will strengthen. Central banks have limited foreign reserves and if the volume sold and bought by speculators is huge, even central banks cannot do much to stabilize their currencies. This is evident in the 1997 Asian financial crisis whereby speculators short Asian currencies, causing these currencies to devalue. 7. Foreign Debt Many nations, especially the developing and under developed nations, are fond of getting loans from developed nations and international funding sources like IMF and World Bank. This money is immediately added to the balance of payment of the borrowing nation. This will lower the currency value of the borrowing nation. The currencies of the under developed and developing nations always go down because of this unplanned borrowing. African, Caribbean and South eastern nations are good example of this scenario. 8. Political Stability Political stability induces confidence in the investors and encourages capital inflow into the country. This has the effect of strengthening the currency of the country. On the other hand, where the political situation in the country is unstable, it makes the investors withdraw their investments. The outflow of capital from the country would weaken the currency. Any news about change in the government or political leadership or about the policies of the government would also have the effect of temporarily throwing out of gear the smooth functioning of exchange rate mechanism. 9. Psychological factors

The behavior of the major participant in the market can affect the exchange rate. The influence may make the rate move differently from that determined by long term economic forces. A large scale buying or selling by the major participant would make others in the market to follow suitable steps. This will have the effect on the trend of the market. 10. Technical and market factors. Isolated large transactions in the market may upset the markets’ ability to balance the supply of and demand for the currency. The immediate effect will be the wide distortion to the exchange rate. The situation will continue till the amount is fully absorbed in the market and regularity is restored.

What is a Currency Symbol? A currency symbol is a symbolic representation of type of currency used, mostly designated by the country producing the currency. It shouldn’t be confused with the name for different types of money. Euro or dollar is not symbol but actual name. Instead the symbol is a substitution of a symbol meant to indicate the name. For instance in the US we may use $ to indicate US Dollars (USD). Not all countries have currency symbols, and some symbols of the past have been swept away by the introduction of the Euro. For instance the common £ used to indicate the British pound may now be replaced with €, the currency symbol for euros. Similarly ₣ for the French Franc, £ for the Italian Lira, have all been replaced by € for euro. Sometimes a currency symbol may be used to represent more than one country’s money. For instance Canada and America both use the $ sign for dollars. Lira and pound symbols are almost identical. The cent sign used in the US, ¢ is used in several countries to indicate fractions of money. Both China and Japan use the symbol ¥ as their currency symbol. The symbol can refer to China’s yuan, or Japan’s yen. Other Asian countries do not use this symbol. Thailand, as an example uses ß, as a symbol for their currency called baht. There are different ways of notating a currency symbol when using it with a currency amount. Some countries place their symbol after the money amount and others before it. In the US, Canada and Latin America symbols tend to be placed before the money amount, with the exception of the ¢ sign, which tends to follow the amount. In Europe and in other countries, the currency symbol may follow the money amount. If something cost 20 Euros you might see this written as 20 €, but in some countries the € may precede the money amount. There’s also some dispute about how part of a euro is expressed. If something costs 20.50 in euros, this may be written as 20€50 or €20.50. Another expression that is equally common is 20,50€, where a comma replaces the decimal point. When you are unaware of the currency symbol for a country or if one doesn’t exist, there is a generic currency indicator. This is expressed as ¤. It should not be confused with similar currency symbols like the larger rectangle that indicates Paraguayan guarani or Ghanaian currency.

Currency Swaps Currency swaps are agreements between two individuals or entities to exchange specified types and amounts of currencies. Along with the initial exchange of a specific amount of one currency for a specific amount of a different currency, the process of a currency swap normally also includes a series of recurring payments based on the cash flow performance of

the two currencies. This makes a currency swap somewhat different from a currency exchange, in that the exchange normally involves simply exchanging currency at the most recent rate of exchange. The recurring payments that compose the second phase of a currency swap normally make use of both fixed and variable rates of interest. One party will agree to pay a fixed interest rate, while the second party will make interest payments based on a floating rate of exchange. However, it is possible to arrange a currency swap agreement where both parties pay recurring payments based on a fixed rate or a floating exchange rate. The final determination of how the interest rate will be calculated is defined in the terms and conditions that govern the swap. One important aspect of the currency swap that also sets it apart from currency exchanges is the fact that the swapping of the currency is not a permanent component. At the time that the two currencies are swapped, the parties agree to make the recurring interest rate payments for a specific period of time. Once the duration outlined in the agreement is complete, the two currencies are returned to the original owner. However, each party retains all returns that were shared in the form of interest payments. The transaction of a currency swap is usually utilized when there is some expectation that the two currencies in question have potential to realize a significant amount of return via the rates of interest accrued. As can be expected, both parties usually anticipate realizing a higher return with the currency type that is received in the swap. However, since rates of exchange tend to fluctuate over time, there is usually a reasonable chance that both parties ultimately benefit from the currency swap.

Clearing and Settlement Clearing is the transfer and confirmation of information between the payer (sending financial institution) and payee (receiving financial institution). Clearing Houses are normally affiliated with a particular exchange and are authorized to settle the contracts of that exchange. Normally, the two parties to a trade are members of the exchange and its affiliated clearing operation. The two members enter into a contract and enter the details into the electronic trading system so that the trade can be matched between the two parties. The clearing house assumes a contractual obligation in the transaction by functioning as the intermediary between the transactions: the clearing house assumes financial risk by functioning the counterparty for both parties. In this manner each party is protected from the default of either party as the clearing house functions as the buyer and seller of the contract. In order to cover its obligations the clearing house maintains its own capital base, bank facility guarantees, and collects member margin payments. Settlement is the actual transfer of funds between the payer’s financial institution and the payee’s financial institution. Settlement discharges the obligation of the payer financial institution to the payee financial institution with respect to the payment order. Final settlement is irrevocable and unconditional. Settlement of an exchange monitored or OTC transaction irrevocable cash payment for a currency, commodity, security or derivative contract premium may be conducted several ways (Bond and Repo clearing is slightly different process): 1. One-way cash payment, made electronically or physically 2. Payment of one currency for the receipt of another currency 3. Delivery vs payment, or the simultaneous exchange of cash for a security Settlement Instructions must at a minimum include: 1. Name of Institution

2. Name of clearing bank and ABA routing Number (if applicable) 3. Account Number 4. SWIFT Address Multilateral Netting Settlement System : It allows 2 counterparties with numerous transactions between them to sum the total due to each other and settle through a single payment / receipt by just paying the difference between the two amounts to the party that has the net due amount. This situation requires that the 2 parties execute a bilateral Netting Agreement prior to entering into any transactions.

Payment and Settlement Systems Payment systems are a vital part of the financial infrastructure and market economies, and by functioning reliably and efficiently they contribute to general stability and efficiency in the economy. A core task for payment systems is to facilitate the settlement of monetary liabilities arising from the business activities of entities in markets for goods and in financial markets. Users of payment systems expect their payments to be carried out securely, quickly and efficiently, allowing debtors to settle their liabilities to creditors via the systems. Definitions There are several definitions of payment systems. According to the Bank for International Settlements’ (BIS) glossary, “payments systems consist of a series of instruments, banking processes and interbank payment systems that allow money to circulate”. As per The Slovenian Payment Transactions Act, “it is a legal relationship between three or more payment system members in connection with the mutual settlement of monetary liabilities, regulated by system rules (an interbank payment system).” In the narrower sense, payment systems involve the exchange of information about payments (clearing) and the transfer of money arising from payments (settlement) between banks as payment services providers that are required in the case when the payer and the recipient are not customers of the same bank (or in the case of payments between banks). In the widest sense, payment systems consist of the institutions, rules, procedures, instruments and technology that facilitate the transfer of money to the widest range of users. The main elements within this are the banking services and the infrastructure of the banking system – the commercial banks, the central bank and the links between them. Payment Instruments Particularly important are payment instruments that allow users to transfer money or to settle liabilities. Technological advances have helped in the creation of new, advanced ways of settling monetary liabilities that guarantee users greater security and speed of payments. Payment instruments are based on technical standards and contractual rules that define the mutual rights and obligations between the issuer of the payment instrument and holders in respect of the way

in which the payment instrument may be used and the use of technical equipment that allows direct or indirect access to money in a transaction account. Models or types of payments In general there are three models of systems for interbank payments – 1. Real-time gross settlement (RTGS) In this method, each payment order is settled immediately upon its entry into the system in its entire (gross) amount. These systems are normally operated by central banks, with the commercial banks holding settlement accounts at the central banks. A payment order sent by the first bank to debit its account is processed immediately, and provided that it has sufficient funds in its account at the central bank its account is debited to credit the account of the second bank. This procedure is applied to each individual payment. 2. Principle of Netting This means that payment orders debiting the accounts of participants are collected for a certain time period, and then at the end of that time the net position is

calculated for each

participant on the basis of the payment orders sent and received. Netting thus entails the conversion of claims and liabilities arising from mutual payments between participants in the system into a single net claim or liability (multilateral netting) or several net claims and liabilities (bilateral netting), which is/are then received or paid by a participant. The multilateral net position or individual bilateral net positions between participants are then usually settled by transferring money via accounts at the central bank. Advantages of netting system: A. From the point of view of banks, the main advantage of net settlement systems (in respect of RTGS) is the lower liquidity requirement that they need in order to settle

payments of a

specific value (only the difference between the value of an individual bank’s incoming and outgoing payments is settled by transferring funds). B. Netting systems are more efficient from the point of view of the communications and processing capacity employed, which has an impact on the price of transactions. However, these systems expose participants to a settlement risk, as they are implicitly giving each other unsecured credit on the basis of payments that are not immediately settled in final terms. 3. Cross-border payment system Domestic payment systems allow the exchange of payments and their settlement between banks as payment services providers within a single country. Given the increasing integration of markets for goods and financial services, there is increasing focus on the provision of interbank payment systems for cross-border payments, i.e. those where the payment services

providers for the creditor and for the debtor are not from the same country. Cross-border interbank payment systems allow payment services providers from different countries to participate, allowing for the clearing and settlement of payments between them, and thus making a significant contribution to the integration of markets.

Forex Trading and Settlement – Past and Present In the 1970s, foreign exchange (FX) trading emerged as a significant line of business for large, internationally active financial institutions. Prior to the mid-1970s, the true commercial need to convert demand deposit account balances from one currency to another was related to import/export transactions that involved letters of credit, and FX rates for any currency tended to be fixed, pegged to another currency, or other wise contained within predefined target ranges. During the 1970s, FX rates began to float freely; once currencies were free to seek their own economic values, banks quickly realized that FX trading rooms were potential profit centers. More importantly, the methods by which trading counterparties today de- liver the currency sold, and receive the contra-currency purchased, are far better and safer than the methods under which FX trades settled in the 1970s and 1980s. The Basics In the 1970s, there were many more European currencies than there are today. Traveling from one European country to another or conducting business in a variety of European countries required that one had sufficient quantities of the proper currencies of all these countries. Imagine traveling from Texas to California, passing through New Mexico and Arizona, with each requiring its own “state” currency. Today, the so-called euro zone (comprising 25 member states of the European Union) has a single currency, the euro, which is the second most dominant (traded) currency in the world behind the U.S. dollar. An FX trade, by definition, involves two currencies, the currency sold and the currency purchased, for example, selling U.S. dollars (USD) and buying British pounds sterling (GBP). Foreign exchange transactions always involve both a trade date and a settlement date. The latter is typically called a value date— the forward banking day common to both countries on which both parties to the transaction will pay the currency amount they are obligated to pay with the full expectation that they will receive the currency amount that they are entitled to receive. Foreign exchange trades typically settle according to standardized settlement conventions, e.g., “for spot” or in two business days; for 30, 60, or 90 calendar days for ward; and on the Wednesday following the third Monday of March, June, September, and December. Al- though most FX is traded for spot, many FX transactions are negotiated either well before the planned settlement date (usually to lock in the rate of exchange in advance) or just before the date of a well-anticipated commercial transaction (if fixing the rate of exchange in advance is not a priority). Finally, there is the issue of temporal risk. Depending on the countries involved, the actual payment of the currency sold and receipt of the contra-currency received will almost certainly occur at different times (but on the same day) and could occur as much as 14 hours apart. “Trust me” FX settlement In the early 1970s, the trading of FX was dominated by ver y large international banks. Settlement payments were made on trust that the contra-currency would be remitted by the

counterparty on the proper value date. Banks were accustomed to quantifying and limiting risk exposures to each other, and the trading and ultimate settlement of FX transactions involved such exposures. As there were then no techniques that might have ameliorated the temporal and principal risks associated with FX settlements, those risks were recognized for what they were and addressed by the trading and settlement limits that banks set for each other. This “trust me” system of settling FX transactions worked fairly well until June 26, 1974. On that Wednesday, German banking authorities shut down Bankhaus Herstatt at the close of the German business day. It was not, however, the close of the global financial day. In New York, where the majority of the USD sides of FX transactions settled through the Clearing House Interbank Payments System (CHIPS), it was only late morning (six hours behind Germany). Foreign exchange settlements involving German deutsche marks (DEM) were allowed to be processed (by the bank regulators) through the end of the German banking day. At the close of the German banking day, German banking authorities stopped all of Herstatt’s banking activities. The Chase Manhattan Bank, Herstatt’s USD correspondent bank, stopped sending dollar payments on behalf of Herstatt through CHIPS. Other banks that had entered into FX contracts to sell DEM (and any other currency versus the dollar) and receive USD suddenly realized that they had already paid the DEM to Herstatt and now stood to receive no USD in return. The trust me system essentially came apart at the seams. This is a real life example of why 100% of the principal of an FX transaction is at risk on the value date. First improvements: In a crude way, the International Monetary Market (IMM), a division of the Chicago Mercantile Exchange, initially began to protect itself from “Herstatt risk” by requiring that buyers of maturing foreign currency futures contracts remit their USD to the exchange one or two days before the settlement date. This early asymmetric approach at least eliminated Herstatt risk for the buyers of FX (sellers of USD). March 1977 - The IMM implemented the first payment versus payment methodology for delivering FX on maturing futures contracts. Sellers of foreign currency were instructed to deliver their foreign currency into the IMM’s indigenous foreign currency deliver y accounts. Sellers making good delivery were paid their USD from Chicago; those that failed to make good deliver y were not. Dollars so withheld constituted cash collateral that secured any foreign currency overdrafts in non-dollar accounts at the IMM’s bank. Principal risk associated with the settlement of FX was thus eliminated. 1990 -The Society for Worldwide Interbank Financial Telecommunication (SWIFT) inaugurated its FX trade confirmation comparison service, Accord. This additional value-added service automated much of the back-office processing of FX trades, provided running settlement exposures to counterparties by currency and value date, and optionally created the additional SWIFT messages to cause FX payments to be made on the appropriate value date. SWIFT’s Accord later became the “front end” to the CLS (Continuous Linked Settlement) Bank International. March 1996 - The Bank for International Settlements (BIS) published the Allsopp Report, a sobering insight into the magnitude of the daily settlements among the 80 largest banks in the world and the risk mitigation tools they were using. In many cases, the risk of FX settlements of a single large international bank to a single counterparty often exceeded the capital of the bank. That October, the U.S. Federal Reserve announced that its Fedwire funds transfer service (Fedwire) would open at 12:30 a.m. eastern time, starting on December 8, 1997. This meant that, for the first time, Fedwire and all other major national payment systems would have common operating hours. Other central banks made minor adjustments to their respective settlement deadlines, removing virtually all remaining obstacles for the emergence of a potential private sector solution that could provide true payment versus payment settlement of the world’s FX transactions (without principal risk). At the annual SWIFT international banking operations seminar (Sibos), held in Florence, Italy, in 1996, a consortium of approximately 20 banks announced that it would expend significant resources to

develop a simultaneous payment versus payment methodology to settle FX transactions. This methodology would become known as CLS, for Continuous Linked Settlement.This consortium of banks also announced that its members expected to use SWIFT’s Accord for CLS’s “front end.”

21st century methodology CLS Bank International commenced operations of its CLS service on September 9, 2002. The CLS system makes every payment individually by simultaneously transferring, across its own books, the currency sold and the currency purchased. Because the system queues transactions in the optimal order to be processed (meaning the order that minimizes the clearing participants’ actual funding requirements), the amount of actual funding required of CLS clearing participants is only about 2% of the gross amount of settlements. Clearing participants are required to remit currency payments to the CLS accounts maintained at central banks by a specific time. The CLS process is designed to take advantage of the overlapping hours of the national payments systems of the relevant currencies to fund the multilaterally netted settlement obligations (pay-ins) necessary to extinguish the provisional credit extended by CLS Bank International to its clearing participants. Today, on average, slightly over $2 trillion of FX transactions settle every business day without principal risk. That is, CLS does not guarantee that the counterparty with which a party elects to do an FX transaction will necessarily complete it, or complete it with proper value. Rather, CLS represents that if a party delivers its FX properly, it will receive the contra-currency (if the counterparty delivers it properly) or the FX payment will be returned (if the counterparty fails to deliver its contra-currency). Thus, the Herstatt risk has been eliminated, although counterparty operational performance exposure remains. Conclusion In the 1970s, the trading of FX emerged from a little known money changing operation, usually associated with the letter of credit departments of large international banks, to a major line of business for many of these banks. Telecommunications have evolved from 300 baud Edward R. Murrow-esque teletype machines to electronic trading screens with near instantaneous response times. SWIFT, itself created in the early 1970s has emerged as the network of choice for banks to exchange (transmit) FX trade confirmations and to send payment instructions that ultimately settle such trades (most likely through CLS). The trust me method of settling FX transactions with all of its inherent risks is almost history. It is appropriate, given the explosive growth in global capital markets in general and foreign exchange in particular, that today’s modern financial system can settle every day (on average) 170,000 transactions, the approximate equivalent of $2 trillion15 of FX transactions, without principal risk.

Continuous Linked Settlement (CLS) Bank What is CLS Bank? CLS (continuous linked settlement) Bank is a private sector special purpose bank that uses the CLS system to settle payments associated with a foreign exchange (FX) transaction simultaneously. Before CLS services and CLS Bank, each side of a foreign exchange was paid separately. Importance of CLS CLS is designed to eliminate the risk occurring when each leg of certain FX transactions is settled separately, i.e., the payment is made and the corresponding payment is not received. CLS Bank settles payment instructions in the following currencies: Australian Dollar, Canadian Dollar, Danish Krone, Euro, Japanese Yen, Norwegian Krone, Singapore Dollar, Swedish Krona,

Swiss Franc, GB Pound, and U.S. Dollar, and is expected to add more currencies over time. Reason for CLS birth Most of us must be knowing the early 1970s for a recession and endless waits at gas stations. But some of us also remember how a small German bank, initiated the collapse of the global payments industry .The defining moment in wreaking havoc was in 1974, when Bankhaus Herstatt received funds but did not pay out. Suddenly hundreds of millions of dollars were not only at risk--they were lost.. Preventing another event brought about by a player reneging on promised payment was behind the 2002 launch of CLS Bank International. While CLS exists primarily to eliminate the risk of paying away one currency and failing to receive the other, there are benefits beyond preventing another Bankhaus Herstatt event Members of CLS Customers may join CLS Bank as either a Settlement Member or User Member. Settlement members have accounts with CLS Bank and must sponsor User members that do not have such accounts. Any Settlement member or User member may submit payment instructions for settlement processing, but the sponsoring Settlement member must authorize each instruction a User member submits. Non-members may settle their FX payments through private arrangements with members who will submit the settlement processing instructions to the service. Such members are responsible to CLS Bank as principals with respect to such payment instructions. How CLS settles the payments? Payment instructions are settled under the CLS Bank rules when it debits and credits the relevant Settlement members’ accounts for the amounts involved. This final settlement will only occur within the context of several risk management tests If any of these tests are not satisfied, no debits or credits will be made, and the pair of Settlement Eligible Instructions will remain on the settlement processing queue and be retested each time the queue is cycled through. The risk management tests will continue to be applied to all Settlement Eligible Instructions on the settlement processing queue until the applicable currency closing time has passed or all Settlement Eligible Instructions on the settlement processing queue have been settled. CLS Bank does not – (a) guarantee the settlement of every payment instruction that is submitted for settlement or (b) become counterparty to any FX transaction referenced in a payment instruction that is submitted for settlement. In the event that a member is unable to provide its expected pay-in, other CLS members may be obligated to provide revised pay-in requirements.

To sum up "CLS will change the market in foreign exchange settlement. It will take about a year as more and more banks bring the back offices into alignment with CLS. But, indeed, CLS Bank will change the market."

The Bank for International Settlements (BIS) Headquartered in Basel, Switzerland, the Bank for International Settlements (BIS) is a bank for central banks. Founded in 1930, the Bank for International Settlements is the oldest global financial institution and operates under the auspices of international law. But from its inception to the present day, the role of the BIS has been ever-changing, as it adapts to the dynamic global financial community and its needs. Read on as we explain this bank and its role in global banking.

Development of BIS The BIS was created out of the Hague Agreements of 1930 and took over the job of the Agent General for Repatriation in Berlin. When established, the BIS was responsible for the collection, administration and

distribution of reparations from Germany - as agreed upon in the Treaty of Versailles - following World War I. The BIS was also the trustee for Dawes and Young Loans, which were internationally, issued loans used to finance these repatriations (restore or return). After World War II, the BIS turned its focus to the defense and implementation of the World Bank's Bretton Woods System. Between the 1970s and 1980s, the BIS monitored cross-border capital flows in the wake of the oil and debt crises, which in turn led to the development of regulatory supervision of internationally active banks. The BIS has also emerged as an emergency "funder" to nations in trouble, coming to the aid of countries such as Mexico and Brazil during their debt crises in 1982 and 1998, respectively. In cases like these, where the International Monetary Fund is already in the country, emergency funding is provided through the IMF structured program. The BIS has also functioned as trustee and agent. For example, from 1979 to 1994, the BIS was the agent for the European Monetary System, which is the administration that paved the way for a single European currency. Notwithstanding all the roles mentioned above, the BIS has always been a promoter of central bank cooperation in an effort to ensure global monetary and financial stability.

Lean on Me Given the continuously changing global economic structure, the BIS has had to adapt to many different financial challenges. However, by focusing on providing traditional banking services to member central banks, the BIS essentially gives the "lender of last resort" a shoulder to lean on. In its aim to support global financial and monetary stability, the BIS is an integral part of the international economy. To promote such stability, the BIS offers a forum of cooperation among member central banks (including monetary agencies). It does so by offering support and banking services for central banks:

1. The BIS offers its support by: -Contributing to international cooperation - As a crucial resource for central banks and other financial institutions, the BIS produces research and statistics, and organizes seminars and workshops focused on international financial issues. For example, the Financial Stability Institute (FSI) organizes seminars and lectures on themes of global financial stability. The governors of member central banks meet at the BIS twice a month to share their experiences, and these meetings function as the core of central bank cooperation. Other regular meetings of central bank executives and specialists, as well as economists and supervisory specialists, contribute to the goal of international cooperation, while also ensuring that each central bank serves its country effectively. The ultimate goal of all these high-level meetings is global financial stability. -Offering services to committees established and working at the BIS - By offering its services to various secretariats of financial committees and organizations created under its patronage, the BIS also functions as an international "think tank" for financial issues. Committees such as the Markets Committee debate and improve upon fundamental issues regarding the workings and regulations of the international financial infrastructure. 2. As the bankers' bank, the BIS serves the financial needs of member central banks. It provides gold and foreign exchange transactions for them and holds central bank reserves. The BIS is also a banker and fund manager for other international financial institutions. How the Bank Operates? The BIS does compete directly with other private financial institutions for global banking activities; however, it does not hold current accounts for individuals or governments. At one time, private shareholders as well as central banks held shares in the BIS. But in 2001 it was decided that the private shareholders should be compensated and that ownership of the BIS should be restricted to the central banks (or equivalent monetary authorities). There are currently 55 member central banks. The BIS's unit of account is the IMF's special drawing rights, which are a basket of convertible currencies. The reserves that are held account for approximately 7% of the world's total currency. Like any other bank, the BIS strives to offer premium services in order to attract central banks as clients. In order to provide security, it maintains abundant equity capital and reserves that are diversely invested following risk analysis. The BIS ensures liquidity for central banks by offering to buy back tradable

instruments from central banks; many of these instruments have been specifically designed for the central bank's needs. In order to compete with private financial institutions, the BIS offers a top return on funds invested by central banks. The statutes of the BIS are presided over by three bodies: the general meeting of member central banks, the board of directors and the management of the BIS. Decisions on the functions of the BIS are made at each level and are based on a weighted voting arrangement.

Conclusion The BIS is a global center for financial and economic interests. As such, it has been a principal architect in the development of the global financial market. Given the dynamic nature of social, political and economic situations around the world, the BIS can be seen as a stabilizing force, encouraging financial stability and international prosperity in the face of global change.

Payment Messaging Systems Financial institutions, corporations, and other organizations employ wholesale payment message systems to originate payment orders, either for their own benefit or for a third party. These systems are indispensable components of funds transfer activities. Unlike payment systems, which transmit actual debit and credit entries, message systems process administrative messages and instructions to move funds. The actual movement of the funds is then accomplished by initiating the actual entries to debit the originating customer's account and credit the beneficiary's account at one or more financial institutions. If the beneficiary's account or the beneficiary institution's account is also with the originator's institution, the institution normally handles the transaction internally through a book transfer. If the beneficiary related accounts are outside the originating customer's institution, the parties will complete the transfer by use of a payments system such as Fedwire Funds Service or CHIPS. The means of arranging payment orders range from manual methods (e.g., memos, letters, telephone, fax, or standing instruction) to electronic methods using telecommunications networks. These networks may include those operated by the private sector, such as SWIFT or Telex, or operated internally by or for the institution. The internal networks can be for intercompany purposes only or connected to customer sites. Even though the transfers initiated through systems such as SWIFT and Telex do not result in the immediate transfer of funds from the issuing institution, they do result in the issuing institution having an immediate liability, which is payable to the disbursing institution. Therefore, the physical and logical controls surrounding payments messaging systems should include: 1. Physical controls limiting access to only those staff members assigned responsibility for managing the payment messaging system; 2. Logical access controls restricting access on a need to know basis 3. Assigning access to payment messaging application and data based on functional job duties and requirements and 4. Identification and authentication controls used to authenticate access to payment messaging systems. Following document explains better, the various message types and purposes for which they are used.

List of Messages.pdf

SWIFT (Society for Worldwide Interbank Financial Telecommunication) What is SWIFT? SWIFT (Society for Worldwide Interbank Financial Telecommunication) is an industry-owned cooperative, which supplies secure, standardized messaging services and interface software to 7,500 financial institutions in 199 countries through an IP-based network. When it was started? In 1973, supported by 239 banks in 15 countries, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) started the mission of creating a shared worldwide data processing and communications link and a common language for international financial transactions with forty square meters of office space in the centre of Brussels, a handful of people and an ambitious idea. SWIFT members: The SWIFT community includes a variety of financial services firms, including banks, broker/dealers, and investment managers, as well as their market infrastructures in payments, securities, treasury, and trade. The SWIFT core application is the FIN (Financial Transaction) application, which provides a store and forward financial messaging service accessed over X.25 network connections. How SWIFT works? SWIFT messages may be used to transmit payment instructions for both domestic and international financial transactions. Financial institutions generating a high volume of funds transfer activity typically establish direct SWIFT connectivity with their internal, interbank funds transfer system. The SWIFT network controls the integrity of the messages once properly entered at the point of origination. Thus there is no requirement for the receiver to re-verify payment orders. As a result, payment instructions pass through the system without human intervention unless programmed conditions (e.g., overdraft limit excesses) or error messages occur. Recent development: In 2002, SWIFT began migrating its core FIN application from an X.25 network to SWIFTNet, an IP-based network using the Secure Internet Protocol Network (SIPN). The introduction of IPbased technologies, that uses both bilateral keys and public keys, will allow SWIFT to expand its services. Payment-related business solutions currently being developed include cash reporting, bulk payments processing, and securities reporting. To promote the use of SWIFTNet and XML (Extensible Markup Language) based cash reporting tools among major cash clearing institutions and their correspondents, a working group has been set up to design the industry solution, including query/response standards and a rule book. In bulk payments, SWIFT developed a new XML-based message standard that was introduced in 2002.

Cover Payments Meaning Cover payments are used in correspondent banking, usually to facilitate international transactions. They are payments made through a chain of correspondent banks to settle (“cover”)

a credit transfer message that travels a more direct route to the ultimate beneficiary’s bank. Cover payments are used in correspondent banking, in particular, to execute transfers ordered by customers in foreign currencies. This technique of cover payments has advantages for banks, but the current messaging standards do not ensure full transparency for the intermediary banks on the transfers they are helping to execute.

How it works? Cover payments, a common part of the global payments system, can disguise the source, and eventual destination, of a funds transfer because the current message format--Swift's MT 202-does not require that the originator or beneficiary be identified. The MT 202 messages can also contain an underlying MT 103, which allows for an unconditional transfer of funds, compounding the issue.

Voice against… Critics say that 103s are routinely sent without critical information on counterparties. Although the use of cover payments creates efficiencies for banks, current messaging standards do not ensure full transparency of the ultimate originator and beneficiary involved in the transaction. As a result, regulators have raised concerns that cover payments could expose intermediary banks involved in the transaction to an increased risk of unknowingly facilitating illicit activities.

Prospective changes In April 2007, the Wolfsberg Group, a group of global banks and The Clearing House Payments Company, partnered to address this problem and developed a set of four payment message standards designed to increase transparency of international payments. To improve the transparency of international transactions, SWIFT will be making enhancements to existing payment messages for cover payments. The new format will include originator and beneficiary details for cover payment messages. The new message will also have a maximum length of 10,000 characters, which will make it possible for an originating bank to send a single aggregate cover payment containing payment instructions for multiple underlying individual transactions, potentially with a variety of ultimate originators and/or beneficiaries that happen to use the same banks in a given correspondent banking chain. SWIFT will implement the new cover payment message in November 2009. If you are a SWIFT participant, you can obtain more details about this issue, including the format specifications for the proposed cover payment messages, by emailing the SWIFT U.S. National Group at [email protected].

Real-Time Gross Settlement (RTGS) System RTGS is a type of payments system operating in real-time rather than batch processing mode. It provides immediate finality of transactions. Gross settlement refers to the settlement of each transfer individually rather than netting. Fedwire is an example of a real-time gross settlement system. In other words, it is a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching with any other transaction. Once processed, payments are final and irrevocable This "electronic" payment system is normally maintained or controlled by the Central Bank of a country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic accounts of Banks. For example, by making adjustments in the accounts of Bank A and Bank B i.e., reducing the amount in Bank A's account by $1000 and increasing the amount

of Bank B's account by the same. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as BACS (a not-for-profit payment system in the United Kingdom and is owned by 13 banks and building societies -UK and European. The company's two principal electronic payment systems are Direct Debit and Direct Credit.) In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. To continue with the above example, say another person deposits a check drawn on Bank B in Bank A for $500. At the end of the day, Bank A will have to "electronically" pay Bank B only $500 ($1000 - $500). The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. RTGS does not require Core Banking to be implemented across participating banks. Any RTGS would employ two sets of queues: one for testing funds availability, and the other for processing debit/credit requests received from the Integrated Accounting System. All transactions would be queued and submitted for funds availability testing on a FIFO+Priority basis. Below is a list of countries and their RTGS systems:-Australia - RITS -Bulgaria - RINGS (Real-time INterbank Gross-settlement System) -Canada - LVTS (Large Value Transfer System -This is actually an RTGS Equivalent system. Final settlement happens in the evening) -Croatia - HSVP (Croatian: Hrvatski sustav velikih placanja) -Czech Republic - CERTIS (Czech Express Real Time Interbank Gross Settlement System) -Denmark – Kronos -Hungary – VIBER -India – RTGS and NEFT (National Electronic Fund Transfer) -Iran - SATNA -Israel - Zahav (Credit and Transfers in Real Time) -Kuwait - KASSIP (Kuwait's Automated Settlement System for Inter-Participant Payments) -Macedonia - MIPS (Macedonian Interbank Payment System) -Poland – SORBNET -Romania - ReGIS -Turkey - EFT (Electronic Fund Transfer)

-Hong Kong – CHATS (Clearing House Automated Transfer System) -Singapore - MEPS+ (MAS Electronic Payment System Plus) -Switzerland - SIC (Swiss Interbank Clearing) -United States – Fedwire and CHIPS -UK - CHAPS (Clearing House Automated Payment System) -Albania- AECH During the past decade a number of countries, inside as well as outside the Group of Ten, have introduced real-time gross settlement (RTGS) systems for large-value funds transfers. Nearly all G-10 countries plan to have RTGS systems in operation since 1997 and many other countries are also considering introducing such systems.

Fedwire What is Fedwire? Fedwire is a real-time gross settlement system (RTGS) system owned and operated by the Reserve Banks that enables participants to make final payments in central bank money. Fedwire consists of a set of computer applications that route and settle payment orders General Background The international financial community has worked over time on initiatives to strengthen the global financial infrastructure. As one of these initiatives, the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries developed the Core Principles for Systemically Important Payment Systems (Core Principles). The Board of Governors of the Federal Reserve System has incorporated these principles into the Federal Reserve Policy on Payments System Risk (PSR policy). This assessment has been conducted pursuant to the PSR policy. Thus came into existence, the fedwire. Role of Fedwire As a real-time gross settlement (RTGS) system for the United States and the U.S. dollar, the Federal Reserve Banks' Fedwire® Funds Service (Fedwire) plays a critical role in the implementation of United States monetary policy through the settlement of domestic money market transactions. Fedwire is also an important vehicle for time-critical payments related to the settlement of commercial payments and financial market transactions. As a Central Bank, the Federal Reserve seeks to foster the safety, efficiency, and accessibility of Fedwire and other Reserve Bank payment systems. As a systemically important payment system, Fedwire must meet or exceed the current international standards for such systems. This assessment contributes to these goals, and the Federal Reserve will update and review this assessment periodically. Overall, Fedwire observes each of the applicable Core Principles. As an RTGS system with final settlement in central bank money, Fedwire meets the minimum standards for settlement assets and finality. Access to Fedwire Access to Fedwire is determined by objective, publicly disclosed criteria. Fedwire's rules and

procedures are clear and permit participants to understand the financial risks resulting from participation in the system. The rules help minimize financial risks in Fedwire and provide incentives to manage any remaining risk. Financial institutions may access the Fedwire Funds Service via high-speed direct computer interface (CI), FedLine, or with off-line telephone connectivity with a Federal Reserve Bank. On-line participants, using either a CI or FedLine PC connection to Fedwire Funds Service, require no manual processing by the Federal Reserve Banks. Off-line participants provide funds transfer instructions to one of two Federal Reserve Bank customer support sites by telephone, and after authenticating the participant, the Federal Reserve Bank enters the transfer instruction into the Fedwire Funds Service system for execution. How Fedwire works? Fedwire operates effectively and efficiently, providing secure, reliable, and practical services to its customers. Fedwire’s governance arrangements are effective, accountable, and transparent. An institution that maintains an account with a Reserve Bank generally can become a Fedwire participant. Participants use Fedwire to instruct a Reserve Bank to debit (charge) funds from the participant's own Reserve Bank account and credit the Reserve Bank account of another participant. Depository institutions that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire Funds Service to send payments to, or receive payments from, other account holders directly. Fedwire processes and settles payment orders individually throughout the operating day. Payment to the receiving participant over Fedwire is final and irrevocable when the amount of the payment order is credited to the receiving participant's account or when the payment order is sent to the receiving participant, whichever is earlier. Fedwire participants send payment orders to a Reserve Bank on line, by initiating an electronic message, or off line, via telephone. Payment orders must be in the proper syntax and meet the relevant security controls.

CHIPS (Clearing House Interbank Payments System) What is CHIPS? As we all know Fedwire is operated and regulated by Federal Reserve Bank. In contrary to this, CHIPS is a privately operated, real-time, multilateral, payments system typically used for large dollar payments. CHIPS is owned by financial institutions, and any banking organization with a regulated U.S. presence may become an owner and participate in the network. Participation in CHPS The payments transferred over CHIPS are often related to international interbank transactions, including the dollar payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns. Payment orders are also sent over CHIPS for the purpose of adjusting correspondent balances and making payments associated with commercial transactions, bank loans, and securities transactions. To facilitate this prefunding, CHIP Co. members jointly maintain a pre-funded balance account (CHIPS account) on the books of the Federal Reserve Bank of New York. Under the real-time finality arrangement, each CHIPS participant has a pre-established opening position (or initial prefunding) requirement, which, once funded via a Fedwire Funds Service funds transfer to the CHIPS account, is used to settle payment orders throughout the day A participant cannot send or receive CHIPS payment orders until it transfers its opening position requirement to the CHIPS account. Opening position requirements can be transferred into the CHIPS account any time after the opening of CHIPS and Fedwire Funds Service at 9:00 p.m. Eastern Time. However, all participants must transfer their requirement no later than 9:00 a.m. Eastern Time.

How CHIPS Works? During the operating day, participants submit payment orders to a centralized queue maintained by CHIPS. Participants may remove payment orders from the queue at any time prior to the daily cutoff time for the system (5:00 p.m. Eastern Time). When an opportunity for settlement involving one, two or more payment orders is found, the system releases the relevant payment orders from the central queue and simultaneously marks the CHIPS records to reflect the associated debits and credits to the relevant participant’s positions. Debits and credits to the current position are reflected only in CHIPS records and are not recorded on the books of the Federal Reserve Bank of New York. Under New York law and CHIPS Rules, payments orders are finally settled at the time of release from the central CHIPS queue This process, however, typically will be unable to settle all queued messages. Soon after 5:00 p.m. Eastern Time, CHIPS tallies any unreleased payment orders remaining in the queue on a multilateral net basis. The resulting net position for each participant is provisionally combined with that participant’s current position (which is always zero or positive) to calculate the participant’s final net position; if that position is negative, it is the participant’s “final position requirement.” Each participant with a final position requirement must transfer, via Fedwire Funds Service, this second round of prefunding to the CHIPS account. This is how even CHIPS transactions use Fedwire sometimes. These requirements, when delivered, are credited to participants’ balances. Once all of the Fedwire Funds Service funds transfers have been received, CHIPS is able to release and settle all remaining payment orders. After completion of this process, CHIPS transfers to those participants who have any balances remaining the full amount of those positions, reducing the amount of funds in the CHIPS account to zero by the end of the day. In the event that less than all final position requirements are received, CHIPS settles as many payments as possible, subject to the positive balance requirement, and deletes any remaining messages from the queue. Participants with deleted messages are informed of which messages were not settled, and may choose, but are in no way required, to settle such messages over Fedwire Funds Service.

CHAPS (Clearing House Automated Payment System) What is CHAPS? A CHAP (Clearing House Automated Payment System) is an electronic transfer system for sending same day value payments from bank to bank. It operates in partnership with the Bank of England in providing a payment and settlement service for banks. In other words, CHAPS is a British company that provides fund transfers for both the British Pound (sterling) and the Euro within UK. Origin A CHAP is a computerised payment system for clearing cheques in the UK that began operations in 1984. It includes 19 settlement banks, including the Bank of England and nearly 450 participating banks, and is one of the clearing companies within the structure of the Association for Payment Clearing Services. CHAPS offer its Members and their participants an efficient, risk-free, reliable same-day payment mechanism. Every CHAPS payment is unconditional, irrevocable and guaranteed. Plus and minus points of CHAPS 1. The main benefit of CHAPS is that it is fast, secure and efficient and the money is

transferred the same day. 2. Banks themselves use CHAPS to move money around the financial system, but it is also used regularly for business---to-business payments; by solicitors/licensed conveyancers to transfer the purchase price of a house between the bank accounts of those involved; by individuals buying or selling a high-value item, such as a car, who need a secure, urgent, same-day guaranteed payment. However, 1. CHAPS transfers are relatively expensive, with banks typically charging as much as £30 for a transfer. The cost of fast transfers and the slow speed of free transfers is sometimes a subject of controversy in the UK 2. Again, unlike other forms of payment such as cheques, CHAPS payments are irrevocable. The CHAPS Clearing Company now operates two separate Clearings, CHAPS Sterling and CHAPS Euro. CHAPS Sterling The CHAPS Sterling payment system, developed in 1984, is one of the largest real-time gross settlement systems in the world, second only to Fedwire in the US. Sterling handles Sterling denominated inter-bank payments. Although there are only 13 direct members, all UK banks have indirect access through (direct or indirect) correspondent relationships with member banks. CHAPS Sterling can therefore be thought of as the central clearing house for a network of private payment systems run by individual banks. The importance of CHAPS Sterling to the UK economy is illustrated by the fact that payments through the system average about £175 billion (approximately 17.5% of the United Kingdom’s annual GDP) per day. Even a temporary disruption could adversely affect UK economic activity. The central processor for CHAPS Sterling is operated by the Bank of England, and the accounts across which inter-bank payments are made are held at the Bank. As CHAPS system operator and settlement agent, the Bank is involved in all CHAPS Sterling transactions and maintains data on these for research purposes CHAPS Sterling transactions may be divided into-- liquidity transactions and CHAPS Sterling payments. A CHAPS Sterling payment is a payment between two member commercial banks’ CHAPS Sterling accounts. Such a transaction moves liquidity around the system, but does not add or subtract liquidity from the system. A liquidity transaction is any other payment.

CHAPS Euro CHAPS Euro was conceived in 1996 to carry euro payments across the network between Members and to credit institutions across the TARGET infrastructure. CHAPS Euro has been developed over the past three years by the CHAPS Clearing Company, in partnership with the Bank of England, to handle the real-time transmission of euro-denominated payments. Using the same settlement mechanisms as CHAPS Sterling, CHAPS Euro will provide its 19 members and 400-plus participants with a robust, secure means of making. With the advent of EMU(European Economic and Monetary Union), CHAPS Clearing Company recognised the need to provide the international London market with a euro payment

system which combines the benefits of real time gross settlement, security and operational efficiency. CHAPS Euro is designed to provide Europe and the global environment with an unparalleled service for euro-denominated payments. Two specific objectives were the drivers behind the CHAPS Euro Project: — to be the pre-eminent real time gross settlement system for euro denominated payments, and — to be Member banks' access to TARGET (the ECB designed European Clearing system)

TARGET What is TARGET? TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system. TARGET is the interbank RTGS payments system for the euro, offered by the decentralized payment system of Eurosystem and it is used for the settlement of central bank operations, largevalue euro interbank transfers as well as other euro payments. TARGET consists of fifteen national RTGS systems and the European Payment Mechanism (EPM) of the European Central Bank (ECB), all of which are interlinked. Story behind the emergence of TARGET: The introduction of the euro enables internationally-oriented financial and non-financial enterprises in the euro area to centralise their treasury operations, which were up to now spread over a number of currencies. By using a single currency instead of several, it is possible for all enterprises involved in cross-border activity to make considerable savings. One precondition for optimising these savings was that the payment systems themselves would be integrated. The same way national currency areas have an integrated payment system at their disposal, it was essential for the euro area to have the same facility. The European Monetary Union (EMU)-wide interbank market requires, first, that credit institutions have both the incentive and the capability to manage their liquidity positions efficiently and, second, that arbitrage operations can be executed easily and swiftly throughout the euro area. This in turn required the existence of an integrated EMU-wide payment system to ensure that liquidity could be transferred from one participant to another in a safe, easy and timely fashion within the new monetary area, just as it could up to now within the national monetary areas. That is the main reason behind the emergence of TARGET. Objectives of TARGET: TARGET went live in January 1999. The launch of the single currency necessitated a real-time payment system for the euro area. It was developed to achieve three main objectives: (a) to provide a safe and reliable mechanism for the settlement of cross-border payments on an RTGS basis; (b) to increase the efficiency of intra-EU cross-border payments;and (c) to

provide the payment procedures necessary for implementing the ECB’s single monetary policy.

Benefits of TARGET: A Real-Time Gross Settlement (RTGS) system has been operated by the Bank since March 1997. Twenty-one institutions are currently participating in the system. The system, which is known as IRIS (Irish Real-time Interbank Settlement), processes payment instructions received

electronically from the participating institutions and settles the related payments between participants in real time throughout the day. Since January 1999, IRIS has been linked to the domestic RTGS systems of the 14 other EU Member States and to the ECB Payment Mechanism. This linkage facilitates real-time processing of cross-border payments in euro between the 16 systems. The extended system is known as TARGET and can be accessed by over 35,000 banks (including branches and subsidiaries) across the EU. (a)TARGET is a real-time system: Under normal circumstances payments reach their destination within a couple of minutes, if not only a few seconds, of being debited from the sending participant's account; all payments receive the same treatment, regardless of their value. But it is also a gross settlement system in which each payment is handled individually. Acknowledgement of the successful execution of each individual payment order is sent to the sending national central bank in real time. (b)TARGET provides intra-day finality: Settlement is final once the funds have been credited. The money received is central bank money. It is possible to re-use these funds several times a day. Liquidity is tied up only for the length of time necessary for real-time settlement to take place. All monetary policy and intra-day liquidity transactions are governed by the terms of a Master Repurchase Agreement signed between each counterparty and the Bank. (c) To initiate a cross-border payment via TARGET, participants will simply send their payment orders to the euro RTGS system in which they participate using the domestic message format with which they are familiar. TARGET takes care of the rest. The beneficiary participant will receive the payment message in its domestic message format. To conclude TARGET is more than simply a payment infrastructure; it offers a premium payment service which will overcome national borders between payment systems in the European Union (EU).

The next (new) generation – TARGET 2 To better meet the users’ long-term needs and prepare for the enlargement of the euro area, the Eurosystem has currently developed the next generation of TARGET, which is called TARGET 2. TARGET was replaced by TARGET2, characterized by a single technical platform called the Single Shared Platform (SSP), which is an attempt to harmonize the different national RTGS systems. Objectives: TARGET 2 has become a system that (a) provides extensively harmonised services via an integrated IT infrastructure, (b) improves cost-efficiency, (c) is prepared for swift adaptation to future developments, including the enlargement of the Eurosystem. Preparation (ground work) for TARGET 2 1. The Governing Council decision foresees a single shared platform (SSP) for those central banks that decide to join it and to give up their own RTGS platform. 2. In addition, in December 2002, users were invited to comment on the principles and structure of TARGET2 and to indicate their business requirements via a public consultation.

3. In July 2004, the Governing Council approved the General Functional Specifications for the SSP, on which comments by the TARGET users had been sought before. 4. In December 2004, the Governing Council accepted the offer made by the three central banks and approved the building of the SSP for TARGET2 operations. Having completed comprehensive assessment of TARGET 2 planning arrangements, the Governing Counsil of ECB launched TARGET 2 successfully on 19th November 2007. Salient features of TARGET 2: 1. TARGET 2 has transformed the decentralised network of payment systems into a centralised payment system with a single technical platform (SSP) and showed the new way of sharing work within the Eurosystem. 2. TARGET2 guarantees a harmonised level of service for banks all over Europe combined with one single transaction price for domestic and cross-border payments. Thanks to the consolidation onto one single technical platform, which made it possible to offer complete harmonisation to the market in terms of technique and functionality. 3. TARGET2 is one of the best individual payment systems in the world. Together with the US Federal Reserve Bank's FEDWIRE system and the global foreign exchange settlement system “Continuous Linked Settlement” (CLS), TARGET2 belongs to the biggest payment systems worldwide. 4. TARGET2 is also a “system of systems”. It is used for cash settlement purposes by about 60 other systems such as securities settlement systems, retail payment systems etc. What are the benefits of TARGET2 compared with TARGET1? 1. TARGET2 makes the liquidity management of banks much more efficient. Banks will be able to concentrate their European payment operations on one central bank account. Alternatively, they could also pool their liquidity held on central bank accounts in TARGET2. In TARGET1, the euro liquidity was spread across 17 different TARGET components. In TARGET2, there will be only one platform. 2. TARGET2 provides banks with comprehensive online information on a real-time basis and a wide array of options to actively manage their payment flows. This is superior to what European banks have experienced before. For example, Europe-wide transparency on payment “queues” shows all pending incoming and outgoing payments of a bank. This provides banks with a sound basis in order to monitor in a forward-looking manner their liquidity position worth billions of euro. Also sender limits are now applicable on a European-wide basis – a feature which we had already in the German RTGS plus -System. They allow for an easy synchronisation of payment flows between participants with quick finality early in the day. 3. The consolidation achieved by TARGET2 makes it possible to significantly reduce the costs for the operating central banks. And it also means lower fees on a European average. 4. TARGET2 will combine the efficiency of a centralised platform with customer support at national level. To ensure that due account is taken of national peculiarities, business relations with customers will continue to be maintained by the respective “home central banks”. 5. TARGET2 offers first-class resilience being able to cope also with wide-area regional disasters. Owing to its importance for the financial markets, TARGET2 is also a major contribution to financial stability.

6. TARGET2 has a modular construction. Besides payment settlement, central banks can use other modules on the single shared platform. Thereby, they could process other operations, for example the granting of overnight credit, more cost-effectively. 7. The single shared platform is a “basis infrastructure” which could be progressively expanded to offer further services like TARGET2-Securities As with TARGET1… 1. TARGET2 will settle payment transactions in a fast manner and in central bank money with no credit risk. This is a core competence of central banks which cannot be provided by private operators. 2. In addition, liquidity risks are substantially reduced by the advanced features for saving and managing liquidity and 3. In contrast to privately-owned systems, there is flexible access to collateralised intraday credit provided by central banks To conlude with the words of Hans Georg Fabritius, the Member of the Board, Deutsche Bundesbank, these features make TARGET2 a very robust infrastructure also in times of crises.

Forex Glossary

Forex Glossary.docx

The basics of LIBOR (London Inter-Bank Offer Rate) What is a LIBOR? LIBOR is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market (usually in Eurodollars -an American dollar held by a foreign institution outside the U.S., usually a bank in Europe). Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K. How does it operate? LIBOR is determined and released each day at 11 a.m. London time. It then fluctuates throughout the day based upon the market’s expectations for economic activity and the future direction of interest rates. A department of the British Bankers Association averages the interbank interest rates being offered by its membership. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for large loans. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period. Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations. This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day. Why LIBOR is Important?

The LIBOR is the world's most widely used benchmark for short-term interest rates1. It is important because it is the rate at which world’s most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. 2. LIBOR is important because it is often used as the base for variable-rate government and corporate loans and derivative-based products such as credit swaps. A small, impoverished nation, for example, may have to pay a spread of a percentage point or two above and beyond the established LIBOR rate; thus, an increase or decrease in LIBOR will result in a corresponding rise or fall in its cost of borrowing. 3. It is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar. 4. Interest rate swaps are another significant financial derivative dependent on LIBOR. In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital. Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rates swaps, and by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages. LIBOR and Eurodollars The most important financial derivatives related to LIBOR are Eurodollar futures. LIBOR loans are expressed in Eurodollars; United States currency held by foreign entities, such as a British or German bank or insurance company. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds. The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes. Eurodollars are most often the result of American companies using U.S. dollars to pay internationally-domiciled corporations for goods, service, and merchandise purchased. When Uncle Sam is running a trade deficit – that is, purchasing more goods from abroad than it sells – the natural result is an increase in Eurodollars; the result is more foreigners purchasing American companies and assets. While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor benchmark is defined and maintained by the European Banking Federation.

Straight Through Processing (STP) What is STP? Straight Through Processing (STP) enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions. In other words, it is an initiative used by companies in the financial world to optimize the speed at which transactions are processed. This is performed by allowing information that has been electronically entered to be transferred from one party to another in the settlement process without manually re-entering the same pieces of information repeatedly over the entire sequence of events. The concept has also been transferred into other asset classes including energy (oil, gas) trading and banking. Why is STP?

Historically, STP solutions were needed to help financial markets firms move to one-day trade settlement of equity transactions, as well as to meet the global demand resulting from the explosive growth of online trading. Presently, the entire trade lifecycle, from initiation to settlement, is a complex interconnection of manual processes, taking several days. Such processing for equities transactions is commonly referred to as T+3 processing, as it usually takes three business days from the "Trade" being executed to the trade being settled. Industry practitioners, particularly in the US, viewed STP as meaning at least 'same-day' settlement or faster, ideally minutes or even seconds. The goal was to minimize settlement risk for the execution of a trade and its settlement and clearing to occur simultaneously. What is needed? However, to achieve the goal of STP, multiple market participants must realise high levels of STP. In particular, transaction data would need to be made available on a just-in-time basis which is a considerably harder goal to achieve for the financial services community than the application of STP alone. After all, STP itself is merely an efficient use of computers for transaction processing. What are the Benefits? One of the benefits of STP is a decrease in settlement risk. This is because a shortening of transaction-related processing time will increase the probability that a contract or an agreement is settled on time. When fully realized, STP provides asset managers, broker/dealers, custodians, banks and other financial services players with tremendous benefits, including greatly shortened processing cycles, reduced settlement risk and lower operating costs. Some industry analysts believe that STP is not an achievable goal in the sense that firms are unlikely to find the cost/benefit to reach 100% automation. Instead they promote the idea of improving levels of internal STP within a firm while encouraging groups of firms to work together to improve the quality of the automation of transaction information between themselves, either bilaterally or as a community of users (external STP). Other analysts, however, believe that STP will be achieved with the emergence of business process interoperability Conclusion: To sum up, STP solutions are applied to reduce systemic and operational risk and to improve certainty of settlement and minimize operational costs.

Choosing the Best Forex Broker What a Forex Broker does? Brokers provide access to the FX market to individual traders. Typically banks and hedge funds have direct access to the market as they are a part of the market. A broker will provide account keeping services, execute trades and usually provides some software to place orders and allow you to look at current prices and charts. Brokers earn their profit by charging a spread. This is a difference between the buying and selling price. For example to buy EUR/USD, the price may be quoted 15/19, which means that the broker makes a spread of 4 basis points per trade. A trade is either buying or selling a foreign currency position. Choosing the Forex Broker Forex is a fast moving, highly liquid and very volatile market where split-second timing can make all of the difference between profit and loss. Don’t wait until you bail from a position that’s

moving against you to test the speed and honesty of your currency broker. The Best Forex Broker It’s not really possible which is the best forex broker or the top forex broker, mainly because some brokers are better for certain trading strategies than others. For example, long term carry for long term carry trades, a major factor would be the amount of “swap” the broker paid each night on pairs with interest rate differentials, while the spread wouldn’t be a major concern. Conversely, if you are using a forex scalping (buying and selling) strategy, the swap rates will not matter, the spread and execution speed will be of much higher priority. Online brokers either provide or recommend trading platform software to interact with them. Some brokers have their own proprietary software systems and others provide access ports to commercially available software. The trading platform that a broker uses is only the gateway to their services and, in the scheme of things, is really not that important. What important, however, is what services your broker provides and how reputable your broker is. There have been plenty of articles written that tell you to check the reputation of a broker before you use them and to get a trial account before you commit money. Let’s see what constitutes minimally acceptable service levels and what makes a top-most FX broker. A good broker should guarantee prices with firm two-way quotes as well as guarantee fills on ***stop loss and limit orders. Anything less than a “no slippage guarantee” policy is an unacceptable level of service and an indication that you should look elsewhere. There are ways that a dishonest broker can skim profits off of your trade. One of those ways is by taking advantage of what can be up to a 2 minute gap between the time that you place your order and the time that you see the results on your platform. Couple that with the fact that the broker controls the price you see on your trading platform and there’s a custom made opportunity to shave profit from the transaction if the price moved before the transaction was posted back to your screen. This makes it important that your broker shows you what are called “firm prices” and not “indications”. Price “indications” gives the broker room to use your money for their own profit while “firm prices” do not. It says a lot about their financial strength if your broker can meet these qualifications. Speaking of qualifications, find out which exchanges your broker is affiliated with. While there is no Forex exchanges, membership on the Chicago Board of Trade or the London Metal Exchange, New York Mercantile Exchange and other commodity exchanges indicate that your broker is a major player. ***Meaning of Terms 1.Stop Loss order - A stop loss order is an order type whereby an open position is automatically liquidated at a specific price. It can also be said as an order that becomes a market order if and when a security sells at or below the specified stop price. It is used to defend oneself against a potential downward slide in a security. It is often used to minimize exposure to losses if the market goes against an investor’s position. If someone wants to learn forex, stop loss order is quite important. Example: This order type is used mostly for protection. If we are long (buying) the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trading strategy used). So we would enter a sell stop market order with a stop price of 1.1878 2.Stop Limit –It works like a Stop Market order with one major exception. Once the order is activated (by the currency trading at or through the stop price), it does not become a market order. Instead, it becomes a limit order with a specified limit price. The advantage of this order is

that you set a specified price at which your order can be filled. The disadvantage is that your order may not be filled. In this case, your exposure to loss will continue until the position is closed. Example: If we are long the EUR/USD at 1.1888, our concern is to not lose more than 10 pips to the downside (Pending trade strategy used). However, we do not want to be filled via a market order, but rather be filled at a price we specify or better. In this case, we would choose the stop limit order type. You are prompted to enter your stop price and to enter a limit price. So if you set your stop price at 1.1880 with a limit to sell at 1.1878 then you would sell at your price of 1.1878 or better (higher than your limit) if executed.

Types of Forex Brokers There are 4 main types of Forex brokers: market operators, market makers, small brokers and kitchens. Let's examine them.

1. Market Operators This most reliable group includes big commercial banks which are regulated according to bank laws and rules. But to trade with such banks one needs bills of big amount, as from bigger multinational companies, keeping them away from the private investments. Minimal lot is approximately $1 000 000.

2. Market-makers Market makers are financial enterprises which work with smaller broker companies and offer theoretical opportunities of Forex trading to individuals whose trading capitals exceed $50,000. They offer lower cost of Forex market trading and as a rule have more reliable financial base and integrity. However, the minimal size of the bill for $50,000 keeps them away from the main Forex market traders.

3. Small brokers These are little broker's enterprises working with individuals' small capital - which is from hundreds up to several thousand dollars. Risks of carrying out of deals begin when these little broker enterprises clear orders of their clients and work with the dealer or a market-maker. As minimal sizes of the bill which the market-maker demands from these brokers are bigger, it often happens that the local broker merges capital from all the bills of their clients in one bill at a market-maker intended for a broker company. According to this system, the Forex market trader makes the broker company's dealer to get the quotation on an input or an output from a position, and the dealer, in his part, to receive the quotation, influences a market-maker. As soon as the quotation reaches the Forex market trader, he or she instructs the dealer about an input in a new position or an output from an existing position, and the dealer writes it down at respective regulation of the client's bill. As this is the most important moment of the deal, and the dealer makes the respective bargain on their own bill at a market-maker. Therefore, if the client's market inquiry or the deal goes well, the client gains benefit - which is gross profit from Forex market trading a minus spreads and commission fee. The broker company also gets its own respective benefit on Forex deal with their market-maker which is the same as net profit that they will pay to the client plus their own commission and, maybe, little spread. Lost in this deal - the market-maker which has put this money in a pocket, but has lost profit gross from the deal on the whole, got by this broker company. It's important to remember that some broker companies give the client spread bigger than they themselves get from a market-maker, and that's another way of getting benefit in addition to their commission. Certainly, they'll never confess it. The spread can be twice as great. Of course, if the client's case turns out to be unsuccessful, the broker company suffers big loss from the client's bill and will have to pay a market-maker the pure loss after withdrawal of its broker payments and commission fee. In any case, the broker company still gets the commission and a little spread.

4. Kitchens The scheme of "kitchen" works fine if somebody doesn't start to win all the time. Their founders know that many clients just lose their money. And the profit of "kitchen" is these clients' losses. Then "kitchen" is closed with the remnants of clients' money and about two months later appear under other

name. The scheme usually works like that. They offer to teach you for free and to learn how to trade in Forex market. They say this will easily bring you unbelievable profit for the short period of time. They make you believe that 5 % a month is quite achievable but only in case if you open the bill of $1000 at their company. Their teachers are as a rule fine either non-professional Forex market traders or even the people who have never traded in Forex market independently. These lessons last for only several hours. Sometimes the clients are taught with the help of programs "simulators" where any trader "is earning" about 1000 % a week. The biggest part of these "students" are losing their deals from the very start, and every time they're sure that was a good lesson which will make their technics irreproachable, and their following Forex market trading will go successfully. Many of these clients run out of their deposits fast and leave the market, while more stubborn ones "add" money to their bills to receive another chance and to gain profit at last. Al last they lose all their money and leave with physical and financial damages. It's the "victory moment" for such firms as it is their bread and butter. It's they who gain the biggest part of profit on losses of such deals, and many firms also win from spreads or commission fee which they demand for these transactions.

SEPA (Single Euro Payments Area): Definition: “SEPA is an area in which consumers, companies and other economic actors will be able to make and receive payments in euro, whether between or within national boundaries under the same basic conditions, rights and obligations, regardless of their location in SEPA”. The European Payments Council (EPC) representing the European banking industry, the European Central Bank (ECB) and the European Commission (Commission) share a common vision for the creation of the Single Euro Payments Area (SEPA) and the process leading to its realisation. All three institutions are worked together and made their distinctive contributions in bringing about the SEPA from 28th January 2008. Coverage: SEPA has a special focus on the euro area. However, communities in the other countries of the European Union, Iceland, Liechtenstein, Norway and Switzerland will participate in euro payment systems, and have committed to adopt SEPA standards and practices, thereby contributing to the establishment of a single market for payment services in euro. Benefits: 1. SEPA aims to create an integrated market for payment services. This entails the removal of all technical, legal and commercial barriers between the current national payment markets. 2. By developing and using open and common standards, enhancing competition and improving payment services, SEPA will foster an efficient and competitive payments industry. 3. Whilst cash payments using euro bank notes and coins are already possible throughout the euro area, SEPA is about harmonizing the billions of electronic retail payments made with cards, credit transfers and direct debits. This major harmonisation programme is supported by Europe’s banks and will deliver new benefits to consumers and businesses (including public administrations) which make euro payments. 4. The implementation of SEPA led to the continuous improvement of payment services and be forward-looking, both embracing and enabling the realisation of new technological opportunities. 5. In addition to the core SEPA products and services that are currently being developed, SEPA will provide a building block for new opportunities and value-added services beyond the SEPA programme. This will facilitate the end to end integration of financial flows by combining SEPA

products and services with, for example, e-invoicing and e-reconciliation. The realisation of SEPA will therefore eliminate the current differences between national payment instruments and cross-border payment instruments in euro so that consumers, businesses and public administrations will be able to make cashless payments in euro from a single payment account anywhere in SEPA using SEPA-wide standardised instruments. Adoption of SEPA by European Banks The deadline for the adoption of SEPA for region's banks and financial institutions was decided within january,2008. But deadlines have slipped. It has been deided now between 2008and 2010.

The study reveals that the SEPA deadlines of 2008 and 2010 are a significant challenge for the industry. While preferring self-regulation, many of Europe's leading banks expect the European Commission to legislate to ensure delivery of SEPA by 2010. Businesses and public sector organizations operating in Europe have until 2010 to abandon existing national payment instruments and adopt new pan-European credit transfer and direct debits. At least that is the central tenet of the single euro payments area (SEPA), which dictates that from January 2008 banks will start offering SEPA credit transfers and direct debits, new payment instruments designed to reduce the costs of crossborder payments in the eurozone and to harmonize national differences. But migrating to the new . SEPA instruments is not proving as straightforward as banks and regulators had hoped. According to the World Payments Report 2007, a new survey of major European banks, regulators may need to provide further incentives to persuade companies to adopt the new SEPA instruments. It was hoped that SEPA adoption would reach critical mass by 2010, but based on analysis of SEPA implementation and migration plans for the 13 eurozone countries, the report concludes that it is unlikely critical mass will be achieved even by the end of 2011. To conclude “Single Euro Payments Area”, designed to do for electronic payment instruments – such as credit transfers, direct debits and card payments – what the introduction of euro notes and coins in 2002 has already done for cash transactions. So, SEPA is the next logical step on the road to completing the internal market following the introduction of the euro.