Forex Project

INDEX

SR.NO. TITLE PAGE.NO.

1. Introduction

2. Money Transfer

3. Operation of Market

4. Structure of market in India

5. Market Makers

6. Vehicle Currency

7. Chips/Swift/Libor

8. Quotations

9. Types of Transactions & Exchange Rates

10. Future & Swap Contract

11. Activities in FOREX Market

12. FOREX at BRANCH

13. Letter of Credit

14. Preshipment Export Finance

15. Post-shipment Export Finance

16. Dealing Room Operations

17. Back office payment & settelment

FOREIGN EXCHANGE MARKET

INTRODUCTION -

The foreign exchange market is the means by which payments are made across national boundaries. It is also a market in which one currency is traded for another. For example, Indian Rupee (INR) is traded for US Dollar (USD). Hence in this market we have price of one currency in terms of another, such as, 1 USD = 46 INR.

Foreign exchange is the means by which one currency is exchanged for another. It is an over the counter market. This means that there is no single market place or an organized exchange where traders meet and exchange currencies. In this market traders/ dealers sit in the offices (dealing rooms) of major commercial banks around the world and communicate with each other through Internet, Intranet, Telephones and other efficient electronic media.

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently exceeds US$1.9 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.

The foreign exchange market is unique because of:

its trading volume, the extreme liquidity of the market, the large number of, and variety of, traders in the market, its geographical dispersion, its long trading hours - 24 hours a day (except on weekends). the variety of factors that affect exchange rates,

Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading

http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Liquidity

http://en.wikipedia.org/wiki/Commodity_broker

http://en.wikipedia.org/wiki/US$

http://en.wikipedia.org/wiki/Financial_markets

http://en.wikipedia.org/wiki/Governments

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Multinational_corporation

http://en.wikipedia.org/wiki/Speculators

http://en.wikipedia.org/wiki/Central_bank

http://en.wikipedia.org/wiki/Currency

increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market.

MONEY TRANSFER -

Money transfer literally would mean transfer of currency. But in practice very small percentage of money is held in cash. Most of the liquid money is held through “current account” in the banks. Hence to transfer money it would be rare that people withdraw cash from the banks and exchange it. These transfers are done by sending instructions to the banks involved. Instructions are sent through check, written transfer orders, phone, telegraphic instructions, or computer internet networks.

If an Indian company has to make payment in US dollars to one supplier and in Japanese currency (Yen) to another, then probably it has to maintain deposits in US and Japan and issue a check/instruction for money to the supplier. It is rather impractical to maintain account in each of the currency one deals with. To ease the situation, all the major banks maintain accounts in another bank in different countries. The bank in which another bank maintains an account is called as ‘correspondent bank’ of the depositor bank.

OPERATION OF MARKET -

These markets have no physical form, in the sense of there being an actual market place where dealers in currencies meet. Rather the markets exist through a sophisticated network of communications, involving telephone, telex and computer links. London is the world’s largest foreign exchange market, largely due to the business generated from other financial activities relating to products such as insurance and to shipping, commodities and banking.

The markets in different countries are closely associated, and exchange market activity is today a truly international occupation. Further, it is suggested that the foreign exchanges constitute almost perfect markets, with the prices of currencies responding immediately to the finest changes in demand and supply conditions.

Broadly speaking, participants in the foreign exchange markets can be classified into four categories:

1. Customers – Customers are companies that use the market because they require foreign currency in connection with their cross border business.

2. Banks – Some banks act as market makers who undertake at all times to quote buy and sell rates for foreign exchange transactions.

3. Brokers – Brokers act as intermediaries and make their profit from commissions.

4. Official Monetary Authorities – In many countries, they are important participants in the markets, buying and selling currencies with the objective of either stabilizing or altering currency exchange rates for economic policy purposes.

There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading.

The main trading centers are in London, New York, Tokyo, and Singapore, but banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the US session and then back to the Asian session, excluding weekends.

THE STRUCTURE OF FOREIGN EXCHANGE MARKET IN INDIA -

The foreign exchange market in India may be broadly said to have three segments or layers –

First layer consists of the Central banks i.e. RBI and the Authorized Dealers (ADs). Central Banks of various countries (such as RBI in India) intervene in the market from time to time to attempt to move exchange rates in a particular direction. ADs are mostly Commercial banks and Financial institutions such as IDBI, ICICI etc. Second layer is the inter-bank segment in which ADs deal with each other. Third layer is in which ADs deal with their corporate customers.

The forex market is formed by Foreign Exchange Dealers Association and the Foreign Exchange Brokers Association. One can participate in the foreign exchange market through a broker only unless one is the member of the foreign exchange dealers association. Foreign Exchange market, are generally located in major financial centers

Top 6 Most Traded CurrenciesRank Currency ISO 4217 Code Symbol1 United States dollar USD $2 Euro zone euro EUR €3 Japanese yen JPY ¥4 British pound sterling GBP £5-6 Swiss franc CHF -5-6 Australian dollar AUD $

http://en.wikipedia.org/wiki/AUD

http://en.wikipedia.org/wiki/Australian_dollar

http://en.wikipedia.org/wiki/CHF

http://en.wikipedia.org/wiki/Swiss_franc

http://en.wikipedia.org/wiki/GBP

http://en.wikipedia.org/wiki/Pound_sterling

http://en.wikipedia.org/wiki/JPY

http://en.wikipedia.org/wiki/Yen

http://en.wikipedia.org/wiki/Euro

http://en.wikipedia.org/wiki/Euro

http://en.wikipedia.org/wiki/Eurozone

http://en.wikipedia.org/wiki/USD

http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/ISO_4217

http://en.wikipedia.org/wiki/Singapore

http://en.wikipedia.org/wiki/Tokyo

http://en.wikipedia.org/wiki/New_York

http://en.wikipedia.org/wiki/London

http://en.wikipedia.org/wiki/Financial_instrument

http://en.wikipedia.org/wiki/OTC

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

such as New York, Paris, Frankfurt, Tokyo, Singapore, Mumbai, etc. For Foreign Exchange there are no specific trading locations like those for securities or commodities. It is non-localized market.

The participants arrange transactions over telephone, telex, or use other modern means of communications. The size of the market depends on the size of international transactions. Since foreign exchange markets are spread over the whole globe, therefore the market for foreign exchange never closes on the globe. In India Foreign Exchange Dealers Association (FEDAI) sets the rules of the game in the Indian Forex market. FEDAI fixes the exchange margins, interest rates on various types of payment orders.

MARKET MAKERS –

Large commercial banks, licensed dealers and money changers make the Foreign Exchange Market. The commercial banks deal with outside customers on retail level and with each other at wholesale level. The transactions between parties are performed through brokers to preserve the anonymity. All brokers belong to Brokers Association and Foreign Exchange Market Association. The minimum commission is set in the manner characteristic of bilateral monopoly. The broker association negotiates with representatives of banks that have agreed to deal through brokers. In India, Banks are the major participants in this market.

Each bank has a net short or long position in each of the currencies in which it deals. Banks holds balances of spot and forward currencies as inventories for their market making. In India, banks do not take large positions, as incase of US markets. However the banks in Singapore take speculative positions. As in the case of market makers in financial instruments, the position in any currency is altered by adjusting bid and ask prices, i.e. by altering spread quoted to potential traders.

VEHICLE CURRENCY -

Most of the traders in the world are with strong economies such as The United States, Japan, Germany, United Kingdom, etc. There are of course trade transactions between other countries as well. While banks maintain correspondent-banking relations with banks in the other countries, they would obviously prefer to maintain it with those countries’ banks with which their customers have significant trade volume. This is because maintaining such account in another bank abroad cost fees for the book keeping chores performed. The accounts held by a bank abroad are called “Nostro accounts” or due from accounts and those held by a foreign bank with a domestic bank are called as “Vostro accounts”.

Suppose an Indian want to exchange Indian Rupee for Thai Bhat. It is certainly not common that Indian banks would have correspondent relation with Thailand. Certainly though, all major Thai banks would have correspondent bank relations with the US. Hence there will be one quote for USD and INR and another for

USD and Bhat. From these two quotes one can calculate the requisite currency price and effect the trade. In such cases, the US dollar would be termed as Vehicle Currency. US dollar is the most commonly used and the strongest vehicle currency in the international market so far.

CHIPS –

In the United States where almost all foreign exchange transactions are cleared, a computer based Clearing House Interbank Payment System (CHIPS) handles tens of thousands of payments representing transactions worth several hundred billion dollars each day. During the day, all international banks making dollar payments to one another pass this chips money to one another in lieu of real money. At the end of the day the game-master totals up everybody’s CHIPS money to see the net amount that is owed by who to whom, and real money is transferred in that amount.

SWIFT -

The improvement in the domestic US clearing system utilized for international transaction has been followed by improvement in international bank communications that link national clearing system. Banks from 17 countries formed the Society for Worldwide Interbank Financial Telecommunications i.e. SWIFT. SWIFT uses Internet/ Intranet messaging with high level security. SWIFT has largely replaced interbank transfers made by drafts and cheques. The system today offers global coverage.

LIBOR –

The interest rate at which prime banks offer dollar deposits to other prime banks in London. This rate is often used as the basis for pricing Euro-dollar and other Eurocurrency loans. The lender and the borrower agree to a markup over the LIBOR, and the total of LIBOR plus the markup is the effective interest rate for the loan.

FOREIGN EXCHANGE QUOTATIONS -

The executives in the banks who offer price for foreign exchange and deals in Forex are called as ‘traders’. When an Indian corporate customer approaches a banker for a US $, he would quote in the following manner:

46.0501-46.2051 Rs. / $

This quote means following: -

1. Quote is in Rs. 46.0501 and 46.2051 is amount in Rs (per US$).

2. First number i.e. 46.0501 is his bid rate. Trader is ready to pay 46.0501 Rs to buy US$. This is his Rs quote to buy US$.

3. Second number i.e. 46.2051 is his ask rate or offer rate. Trader is ready to give 0ne US$ for 46.2051 Rs. This is his Rs quote to sell US$.

4. Since the quotes is available, for buy and sell both, it is called as “Two Way Quote”.

Bid: If customer gives one US$ to the banker, banker is willing to pay Rs. 46.0501 to him. This is banker’s bid price for dollar in terms of Rupees.

Ask: If customer desires to buy a US$ from the banker, he has to pay Rs. 46.2051 to the banker. The banker is Asking for 46.2051 Rupees / $.

Bid-Ask Spread –The difference between bid rate and ask rate is called as bid ask spread.

Bid Ask rate is the measure of the following:

1. It is margin to cover transactions’ costs and other costs.

2. It covers normal profit on capital invested in dealing function.

3. If trader is being hit on one side more than other side, then this spread indicates his encouragement / discouragement on either side.

Bid-Ask Spread in Percentage terms:

The spread is generally expressed in percentage by the equation –

a) Spread = Ask Rate – Bid Rate --------------------------- * 100

Ask Rate

Here denominator is Ask rate. With this one can calculate the percentage by which, Bid rate is lower as compared to Ask rate.

Alternatively Spread may also be calculated as:

b) Spread = Ask rate – Bid rate-------------------------- * 100

Bid rate

With this one can calculate the percentage by which, Ask rate is higher as compared to Bid rate. Expressing Bid as a discount over Ask is more commonly practiced and hence formula (a) is commonly is used for calculations.

Direct Quote –Foreign Exchange rate expressed in terms of domestic currency per unit of

Foreign currency is called as Direct Quote. For example, 46.32 Rs, / $ is a direct quote in India.

Indirect Quote –Foreign Exchange rate expressed rate of foreign currency per unit (or per

hundred units) of domestic currency is called as Indirect quote. For example, 2.0894 $ / 100 Rs, is an indirect quote in India.

Types of Transactions and Exchange Rates –

1. Spot – A market involving an exchange of bank deposits denominated in

different currencies. A Spot contract implies an exchange two business days after the transaction. Value date is within two working days in Spot Contract.

Spot Foreign Exchange Rate – The rate at which one currency is traded for another is called

Exchange Rate. The exchange rate for immediate delivery is called Spot exchange rate and is denoted by S(.). Where S(.) is the relationship between two currencies, e.g. S(Rs. /$) = Rs. 36.10 / $, is the relationship between rupees and dollars, which says that one dollar is equivalent to Rs. 36.10.

2. Forward – An agreement to exchange, at a specified future date, currencies of

different countries at a specified contractual rate. Foreign currency traded for settlement beyond two working days from today.

Forward Foreign Exchange Rate – The exchange rates for delivery and payment at specified future

dates are called Forward Exchange Rates and is denoted by F(.). Where F(.) specifies a relationship between domestic and foreign currency. The forward exchange rate is contracted in the present for delivery of foreign exchange, e.g. 60 days forward rate between rupees and dollar is the rate at which the foreign exchange dealer can arrange a transaction between rupees and dollar 60 days hence. In other words, the rate at which future transactions are contracted in the present for future delivery of foreign currency is the forward rate. The markets where the purchases and the sales of the currencies are contracted in the present for receipts and delivery in future are called the Forward Market.

Premium and Discounts in Forward Market – A Foreign currency is said to be selling at a forward discount,when

Forward price of the foreign currency is lower in terms of domestic currency than its spot rate or it is quoted higher per unit of domestic currency. Conversely, a foreign currency is said to be selling at a premium, when its forward price in terms of domestic currency is higher than the spot price or it is quoted lower per unit of domestic currency. The domestic currency ‘Rs.’ is quoted at discount against dollar if spot rate is S(Rs / $) = Rs. 31.9802 / $ and the three month forward is F(Rs / $) = Rs. 31.1345 / $. The same currency is at premium if spot rate is S(Rs / $) = Rs. 31.9802 / $ and the six month forward is F(Rs / $) = Rs. 31.0112 / $.

It is calculated as follows:Forward Premium/Discount = n-day forward rate – spot rate 365

------------------------------------- * ------ * 100Spot rate n

If this annualized difference between spot and forward is positive then it is called at forward premium. If negative, forward discount. Forward premium indicates that foreign currency is worth more in the forward market. If it’s worth less, it’s forward discount.

Quotations on Forward Markets –Forward rates are quoted for different maturities such as one

month, two months, three months, six months and one year. Forward quotations may be given either in outright manner or through swap points. Outright rates indicate complete figures for buying and selling. For example, table 1 contains Rs. / Euro quotations in the outright form. These kinds of rates are quoted to the clients of banks.

Table-1 Rs. / Euro Quotations

Buying Rate Selling Rate Spread

Spot 47.9525 47.9580 55 points

1–MonthForward

47.9625 47.9700 75 points

3-Month Forward

47.9750 47.9835 85 points

6-Month Forward

48.0000 48.0090 90 points

If the forward rate is higher than the spot rate, the foreign currency is said to be at forward premium with respect to the domestic currency. This means foreign currency is likely to appreciate vis-à-vis domestic currency. If the forward rate is lower than Spot rate, the foreign currency is said to be at Forward discount with respect to domestic currency. Domestic currency is likely to appreciate.

Apart from the outright form, quotations can also be made with swap points. Number of points represents the difference between Forward rate and spot rate. Since currencies are generally quoted in four digits after the decimal point, a point represents 0.0001 (or 0.01 per cent) unit of currency. For example, the difference between 47.9525 spot and 47.9625 1- month forward is 0.0100 i.e. 100 points. The rates in Table 1 can be written in point form as given in table 2:

Table-2 Rs. / Euro Quotations

Spot 47.9525 / 80

1-month forward 100 / 120



Looking at this table trader can easily understand whether it is a premium or discount. It can be observed as follows:

1-month forward quotation is 100 / 120. Let’s call 100 as bid points and 120 as ask points. If bid points are less than ask points, then it is premium, otherwise discount. Premium points are to be added to the spot quote and discount points to be subtracted.

3. Cash Rate –

The rate of exchange is fixed today and the exchange of currencies takes place on the same day.

4. Tom Rate –

It is a short form of tomorrow. The rate of exchange is fixed today and the exchange of currencies takes place on the next day.

5. Cross Rates –

An exchange rate between the two currencies, neither of which is the US dollar. It is a rate usually constructed from the individual rates of the two currencies with respect to the US dollar. The exchange rate between 2 currencies where neither of the currencies are USD. In foreign exchange, the price of one currency in terms of another currency in the market of a third country. For example, the exchange rate between Japanese yen and Euros would be considered a cross rate in the US market.

FUTURES CONTRACT -

Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds 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. Futures can be defined as, “The simultaneous right and obligation to buy / sell a standard quantity of a specific financial instrument at a specific future date and at a price agreed between the parties at the time the contract was signed”.

It can also be defined as an agreement to buy or sell a standard quantity to foreign exchange at a future date at a price agreed to between the two parties to the contract. The important details about a futures contract that must be remembered are:

It is a simultaneous obligation to buy & sell. The quantity agreed to be bought and sold should be standard.

The financial instrument should be specific.

The future date should be specific.

The price should be specific.

Let’s see major differences between Forward contract and Future contract:-

Feature Forward Contract Futures Contract

Amount Flexible Standard amount

Margin Required Not Required

Risk Depends on Counter party Minimal due to margin

Transparency No transparency Transparency is involved

SWAP CONTRACT -

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 contracts and are not traded through an

http://en.wikipedia.org/wiki/Currency_swap

exchange. Currency swap involve an exchange of cash flows in two different currencies. It is generally used to raise funds in a market where the corporate has comparative advantage and to achieve a portfolio in a different currency of his choice, at a cost lower than if he accessed the market of the second currency directly. However since these types of swaps involve an exchange of two currencies, an exchange rate, generally the prevailing spot rate is used to calculate the amount of cash flows, apart from interest rates relevant to these two currencies. The Swaps are of the following categories:

1) Spot- Forward Swap:

In this swap, one deal is done in the spot market and another in the forward market, i.e. one buys in the spot and sells in the forward or the converse. If the ‘buy’ is in the spot and ‘sell’ in the forward then this is called the swap-in and if sell is in the spot and buy is in the forward the swap is called a swap-out. Suppose an exporter expects to receive $1000 one month hence but needs money in the present. He goes to a bank and ask for a swap. He buys $1000 in the present and sells the $1000 in the forward at the agreed prices. This is a swap-in. Had he been an importer who has to pay a currency two month hence and has currency which he has received from his exports and therefore he sells the currency now in exchange for currency in the future. This swap is called swap-out.

2) Forward-Forward Swap:

In this case both deals are in the forward, i.e. one buys one month forward and sells three month forward, each deal cancelling the other or vice versa. For example, an exporter expects a receipt of $2000 after three months and has a payable after one month in this situation the exporters contact a bank for a swap. The bank agrees to the swap and sells $2000 one month forward to the exporter and buys $2000 three month forward from him at the agreed rates.

3) Pure Swap:

Pure Swaps are those swaps where both the deals have been contracted with one party, i.e. a swap dealer or a bank agrees to contract both buy and sell agreements.

Characteristics of Swap Market –

1. Swaps are custom tailored to the needs of the counter parties. Swaps meet the specific needs of the customers / counter parties.

2. Exchange trading necessarily involves some amount of transparency or loss of privacy, by contrast in the swap market only the counter parties known about the transaction.

3. Counter parties can select amount, currencies, maturities, etc.

Limitations of Swap Market –

1. Each party must find a counter party which wishes to take opposite position.2. Since swap is an agreement between two parties, therefore it cannot be terminated

at one’s instance. The termination also requires to be accepted by counterparties.

3. Future and Forward exchange are guarantors to the transaction where as there is no such guarantee with the swap.

Activities in Foreign Exchange Markets: -

Primary activities in the Forex market are buying and selling of currencies in the spot and forward markets. The buying currencies at the spot is done either to pay for imports of goods or services or arbitraging or for speculative purposes. Main activities are:

1. Option Forwards – Some times the importers or exporters do not know the exact timings of currency outflows or inflows. For these clients, the banks offer option forwards. In these contracts, the exact date of delivery is not fixed instead a period of time is fixed during which the deliveries can be made or received. The exchange rates are fixed in the contract. The period during which the deliveries are made is called option period.

2. Speculation – Deliberate creation of a position for the express purpose of generating a profit from exchange rate fluctuations, accepting the added risk. With motive of speculative profits, lots of money floats in the universal market. This money is highly volatile and runs after profits. Such volatile funds moving for profits are termed as HOT MONEY. Quantum of Hot Money depends upon market conditions, growth trends, natural and political uncertainties. Regional uncertainties and comforts decide the direction of movement of funds.

Speculators are of two kinds: Optimistic and Pessimistic. Former is called as Bulls and later as Bears. Bulls expect price appreciation / strengthening of currencies. Hence Bulls buy and hold with a hope to sell at a higher price. Bears expect fall of price / Weakening of currencies. Hence bears with a hope to recover at a lower price.

3. Hedging - Hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Hedging is a transaction undertaken specifically to offset some exposure arising out of the firm’s usual operations. In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure

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http://en.wikipedia.org/wiki/Risk

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http://en.wikipedia.org/wiki/Risk

to an unwanted business risk, while still allowing the business to profit from an investment activity. In this way, temporary surplus funds in one currency are for a while swapped into another currency for better use of liquidity.

Foreign Exchange at branches: -

Inward Remittances -

Instruments used for Inward Remittances:

The following are the widely used instruments for bringing foreign exchange into the country. Main characteristics of each of the instruments are given in brief. As regards choice, as to which instrument will be most suitable will depend upon, the nature of transaction, amount involved, time factor (i.e. urgency for transfer of funds), avaibilty of banking facilities both at the point of remittance and at final destination etc.

I: Currency Notes-

Main Features -

This is the primary instruments used for bringing in foreign exchange.Advantage: Mainly used by the Travelers as it is most convenient for carry and encashment.

Disadvantage: It is not cost effective as buyer has to pay higher exchange rate while buying and gets lower exchange rate while selling.

Regulatory Requirement:Declaration of CDF is must, if amount brought in the form TCs and Currency notes at any one time exceeds USD 10,000 or equivalent or Currency notes brought in exceeds USD 5000 or equivalent. Obtain for full encashment. Endorse on the reverse for part encashment.

Collection Mechanism and Charges:

A: Can be deposited in account or paid at the counter at current currency Buying

rate.

B: For non customers/ foreign tourists, identification through Passport is must. Exercise caution about forged notes, especially in USD notes. Encashment

only for major currencies like USD, GBP, EUR, JPY. Obtain rate from FEX Center. Ensure quick delivery of notes to FEX Center for prompt disposal.

CDF:CDF stands for Currency Declaration Form. This form is provided in the flight/at Airport on arrival to be submitted by travelers to customs duly filled in customs will return the same duly signed.

II: Travelers Cheques:

This is most convenient instruments used for bringing in foreign exchange pointof view. While purchasing Travelers cheques, buyer has to sign before the issuing official. While encashing TC the encashing person has to sign before the official of the bank. If both the signature tally and the Authorized official is satisfied about the procedure is known as watch & compare method.

Advantage:Mainly used by the Travelers as it is most convenient for carry and

encashment. It has safety net. While purchasing TCs purchase contract is also provided by seller, which is to keep separately form TCs. If TCs are lost, file FIR with the police and reimbursement can be claimed from TC issuing company on the basis of this purchase contract and FIR.

Disadvantage: It is not cost effective as buyer has to pay commission of 1% of rupee value in

India in charges in other countries while buying TCs. But convenient for small amount. Buying rate is lower than instruments purchase rate.


A: Can be deposited in account or paid at the counter at current TC rate.

B: For non customers/ foreign tourists, identification through passport is must. Exercise caution about stolen TCs and forgery of signatures. Encashment only for major currencies like USD, GBP, EUR, JPY. Obtain rate from FEX center. Ensure quick delivery of TCs. To FEX center for prompt disposal.

Recovery of Interest:

It takes a time about 15 days for getting final credit in our Nostro account after the TC is purchased. The bank remains out of funds during this period. However interest

for this period is loading in TC buying rate as per FEDAI guidelines and hence not to be recovered.

Regulatory Requirement:Declaration on CDF is must, if amount brought in the form TCs and currency

notes at any one time exceeds USD 10000 or equivalent or currency notes brought in exceeds USD 5000 or equivalent. Obtain for full encashment. Endorse on the reverse for part encashment.

III: Personal Cheques/ Demand Drafts/ IMO/ Cashier’s Cheques -

Main Features-This is the widely used instruments for bringing in foreign exchange. In foreign

countries even personal cheques carry printed name and address of issuer, which does not mean that such account carry any special status with drawee bank.

Advantage: Mostly used by individuals like non-resident Indians for transferring their funds from overseas accounts for their accounts in India for payment to relatives etc. Used in business for small value transaction most among known parties involving low credit risk. It is most cost effective form for payer as he is not required to pay any charges to his bank while issuing the cheques.

Disadvantage:1) Payee or beneficiary has to pay collection charges.2) Customer has to wait till the realization of the cheques unless it is purchased by the bank.

3) Credit risk is high.


Collection:

1) These cheques are to be collected through clearing system of the respective Currency i.e. all USD cheques payable in USA are to be collected through CHIPS or Fed wire clearing system.

2) In these system credit is given to Nostro account with future value date.

3) Bank has to wait till the return for instrument is over after this value date before passing on credit.

IV: Inward TT

The telegraphic transfer is universally used electronic mode of funds transfer globally. Huge amount are transferred both for commercial transaction and individual remittance using network called SWIFT. Society for World Wide Interbank Financial Transactions is the cooperative society of which India is a member, provides backbone for global transfer of funds. How funds are received through this network, provides backbone for global transfer of funds.

Payment after Value Date:

Normally the payment in USD will be available on the next working day in India after remittance by TT, as the credit given in USA is available in India on next working day due to time zone difference. i.e. Payment affected by remitter in USA on 17th March, 06 (Statement of account with US bank for transaction on 16 th March, 06is received in the morning of 17th March,06 as such statement are made available to clients by US Banks after close of their business hours).

Future Value Date:

On number of occasions, inward TT messages are received with future value date (value date is date on which credit is available for disposal i.e. clear effects). In such cases though the credit entry appears in the statement of earlier date, the funds are available on value date. Moreover, the remitting bank can recall such credit for any reason. So it is necessary to execute such payment instruction after value date only. Normally client presents the remittance advice from their overseas remitter and insists for immediate credit of rupee to their account, in such cases it is necessary to explain the above procedure of inward TT messages.

ACCOUNTS FOR NON RESIDENT INDIANS

I: WHO IS NON RESIDENT INDIAN?

As per provisions of FEMA, NON-RESIDENT INDIAN is;

1: A PERSON RESIDENT (NRI) OUTSIDE India WHO IS CITIZEN OF INDIA i.e.

a) Indian citizen who proceeds abroad for employment or for carrying on any business or vocation or for any other purpose in circumstances indicating indefinite period of stay outside India.

b) Indian citizens working abroad on assignments with Foreign Govt., Govt. Agencies or Agencies like UNO, IMF, WORLD BANK etc.

c) Officials of Central/ States Govt. and PSUs deputed abroad on assignments with Foreign Govt., Agencies/ Organization or posted to their offices including Indian Diplomatic Mission abroad.

2: A PERSON OF INDIAN ORIGIN (PIO)

PIO is citizen of any other country other than Bangladesh or Pakistan, if:a) He at any time held Indian passport or

b) He or either of his parents or any of his grand parents was citizen of India by virtue of constitution of India or Citizenship Act, 1955.

c) The person is spouse of an Indian citizen or a person referred to in (A) & (B) above.

3: INDIAN STUDENT STUDYING ABROAD

As per APDIR circular No.45 date 8 th Dec.03, issued by RBI, the Indian students studying abroad are given the Status of NON RESIDENT INDIAN subject to following condition.

a) They stay abroad for more than 184 days in the proceeding financial year &

b) Their intension to stay outside India for an uncertain period when they go abroad for their studies.

In effect Indian student studying abroad, if fulfills above conditions are treated as on Resident Indians and can avail the facilities as applicable to NRIs.

ACCOUNTS FOR NRIs A Non-resident Indian is allowed to open and maintain following types of

accounts.

1. Non-Resident (External) Rupee Account – NRE Account.

2. Non-Resident Ordinary Rupee Account – NRO Account.

3. Foreign Currency Non-Resident Account (Bank) – FCNR (B) Account.

II: PROCEDURE FOR OPENING OF NRE, NRO, FCNR, (B) ACCOUNT

A: DOCUMENTATION:

While opening any account of the account in the name of Non-Resident India, the authorized dealer or bank is authorized to open such account has to ensure that;

a) To confirm that the person is eligible to be treated as Non-Resident India by applying the criterion given earlier.

b) Application in the form prescribed by the bank is obtained from the NRI along with an undertaking from the applicant to inform the bank the date of his/ her arrival in India for permanent settlement. c) To obtain necessary documentary evidence like passport – visa and employment offer to confirm NRI status.

d) Compliance of KYC guidelines as prescribed by RBI.

Account is to be opened by the account holder HIMSELF and not by the holder of Power Of Attorney in India.

B: OPENING OF ACCOUNT DURING TEMPORARY VISIT OF NRI:

Account can be opened in the name of Non-Resident Indian during his temporary visit to India against tender of foreign currency travelers cheques and notes during temporary visit of NRI to India provided authorized dealer is satisfied that the person has not ceased to be Non-Resident.

III: POWER OF ATTORNEY OR LETTER OF AUTHORITY

In case the account holder wants the account to be operated by resident Indian, he can do so. In that case, a Power of Attorney, authorized such operation in the account be taken on record or separate letter Authority in the form prescribed by bank is to be obtained. If Power Of Attorney is taken, it is to be ensured that clauses relating to operation in accounts does not contravene the provisions of FEMA or any other statute. Power Of Attorney holder or Letter of Authority holder can only operate such account local payment. Recently RBI has allowed PA or LA holder to remit funds from NRE account abroad BUT ONLY IN THE NAME OF ACCOUNT HOLDER.

NON RESIDENT (EXTERNAL) RUPEE ACCOUNT

Factors Prevailing Guidelines 1 Who can

open the account?

A person eligible to get the status of Non Resident Indian can open the account.

2 Currency of This account is maintained in Indian rupees. If remittance is received

account in foreign currency same is to be credited in Indian rupees as per the instruction of account holder.

3 Types of accounts

Account can be in the form of (1) Saving account (2) Current account (3) Recurring deposit account or (4) Term deposits (for minimum period 1 year to normally up to 3 years)

4 Joint account?

NRE Account can be:A: In the single name of Non Resident Indian.B: In the joint name of two or more NRIs.In case of joint account, if any account holder becomes resident his name should be deleted and account to continue as NRE OR existing account to be redesigned as resident account at the option of the account holder.Opening of NRE account joint with resident is not permitted.

5 Permitted credit

A: Travellers cheque and currency notes: The credit of foreign currency notes and travelers cheque during the personal visit of Non Resident Indian in person during his temporary visit to India. As per prevailing regulations, if the amount of foreign exchange in the form of currency notes and travelers cheque brought into India exceeds USD 10,000 or equivalent and / or the aggregate value of foreign currency notes brought in by such persons exceeds USD 5000 or equivalent, the same is to be declared on CDF i.e. currency declaration form. If entire amount declared on CDF is deposited, the original CDF is to be kept on record. If part of the amount declared on CDF is credited to the account, endorsement be made on the original CDF and the copy of the same be kept on record. Such Travellers cheques when deposited must be countersigned in the presence of authorized official. Such Travellers cheque/ currency notes to be converted into Indian rupees through the FEX center/ Overseas Br.B: Proceeds of remittance to India in any permitted currency.C: Personal cheques drawn by account holder on his account abroad.D: Travellers cheque/bank draft drawn in any permitted currency including in Indian rupees, the reimbursement of which will be obtained in foreign currency.E: Transfer from other NRE account.F: Transfer from FCNR by converting foreign currency into rupee at the current TT buying rate.

6 Permitted debits

A: Local disbursements.B: Transfer to NRE/FCNR account of the same person or any other person who is eligible to maintain such accounts.C: remittance outside IndiaD: Investment in shares/ securities or commercial paper on an Indian company or for purchase of immovable property in India provided such investment/ purchase is covered by the regulations made, or

general/ special permission granted by the RBI.7 Repatriation

facilities Repatriation of deposits and interest is freely permitted.

8 Rate of interest

Current deposits : NILSavings : Linked to LIBOR/Swap rate for six months to be fixed by bank quarterly.Term deposits : Linked to LIBOR/Swap rate to be announced by individual bank at the beginning of month.For latest rate : Please get the prevailing rate from C.O. circular Or from Bank’s website.

9 Account operation

The operations in the account may be allowed on the basis of Power of Attorney or Letter of Authority granted in favour of resident by the account holder, provided such payments are in accordance with the provisions of FEMA. Such operations are restricted to local payments only. However as per recent guidelines from RBI, Letter of Authority/ PA holder can remit the funds abroad BUT ONLY TO THE AND IN THE NAME OF ACCOUNT HOLDER.

NON RESIDENT ORDINARY (NRO) RUPEE ACCOUNT

Factors Prevailing Guidelines1 Who can

open the account?

A person resident outside India may open the NRO account. Foreign tourists on short visit to India can also open NRO account.

2 Currency of account

This account is maintained in Indian rupees. If remittance is received in foreign currency same is to be credited in Indian rupees as per the instruction of account holder.

3 Types of account

Account can be in the form of (1) Saving account (2) Current account (3) Recurring deposit account or (4) Term deposits (for minimum period 1 year to normally up to 3 years)

4 Joint account?

NRO account can be: A: In the single name of Non Resident Indian. B: In the joint names with resident or residents.

5 Permitted credit

CONVERSION OF EXISTING ACCOUNT ON BECOMING NRI:

A: If the existing account holder has accounts the value has to be redesignated as NRO account when account holder informs about his change is status from resident to non resident. B: Proceeds of remittances received in any permitted currency from outside India through normal banking channel or any permitted currency tendered by the account holder during his temporary visit

to India or transfer from rupee accounts of non resident banks. C: All credits relating to legitimate dues of account holder.

6 Permitted debit

A: Local disbursement. B: Remittance outside India of current income in India like rent, dividend, pension, interest of NRI, net of application taxes. C: Investment in shares/ securities or commercial paper of an Indian company or for purchase of immovable property in India provided such investment / purchase is covered by the regulation made, or the general/special permission granted by the RBI.

7 Repatriation facilities

Balances in NRO account other than those indicated below are not eligible for remittance outside India without prior approval of RBI.

A: RBI has allowed Authorized dealer to allow repatriation of current income like rent, dividend, pension, interest etc. or NRIs who do not maintain an NRO account in India and have no taxable income in India base on simple declaration, in duplicate from NRIs to the effect he is not a tax payer in India. B: Non Resident Indians are allowed the facility of repatriation of funds out of the balance held by them in their NRO account, sale proceeds of assets (inclusive of assets acquired by way of inheritance), for all bonafide purpose to the satisfaction of undertaking by the remitter subject to ceiling of USD 1 million per calendar year.

The existing prohibition on repatriation of assets to Pakistan, Bangladesh, Sri Lanka, China and Afghanistan, Iran, Nepal & Bhutan shall continue.

8 Other regulations

The same as applicable to resident accounts.

FOREIGN CURRENCY (NON RESIDENT) ACCOUNT

Factors Prevailing GuidelinesWho can open the account?

A person eligible to get the status of Non Resident Indian can open the account.

Currency of account

The amount can be maintained in major currencies namely USD, EUR, GBP, JPY, CAD, AUD. If remittance is received in a currency other than those in which account is to be maintained the same has to be converted into currency of account at the risk and cost of remitter.

Types of account

ONLY IN THE FORM OF TERM DEPOSITS with a minimum period of one year and maximum period of three years only.

Joint account? FCNR (B) account can be: A: In the single name of Non Resident Indian. B: In the joint name of two or more NRIs.

In case of joint account, if any account holder becomes resident his name should be deleted and account to continue as FCNR or existing account to be redesignated as resident account at the option of the account holder.Opening of FCNR account jointly with resident is not permitted.

Permitted Credit

TRAVELLERS CHEQUES & CURRENCY NOTES:

The credit of foreign currency notes and travelers cheques during personal visit of Non Resident Indian in person during his temporary visit to India. As per prevailing regulations, if the amount of foreign exchange in the form of currency notes and travelers brought into India exceeds USD 10,000 or equivalent and/ or the aggregate value of the foreign currency notes brought in by such persons exceeds USD 5000 or equivalent the same is to be declared on CDF i.e. Currency Declaration Form. If entire amount declared on CDF is deposited, the original CDF is to be kept on the record. If part of the amount declared on CDF is credited to the account, endorsement be made on the original CDF and a copy of the same be kept on record.

A: Proceeds of remittance to India in any permitted currency.B: Personal cheques drawn by account holder on his account abroad.C: Travellers cheque/bank drafts drawn in any permitted currency including in Indian rupees, the reimbursement of which will be obtained in foreign currency.D: Transfer from other FCNR account.E: Transfer from NRE by converting rupees into Foreign Currency at the current TT selling rate. F: Interest accruing on the funds held in the account.G: Interest on Govt. securities and dividend on units of mutual funds provided securities / units on which such interest / dividend received were originally purchased by debit to NRE/ FCNR account of the account holder.H: Maturity proceeds of Govt. securities including NSCs where original investment was by dbit to NRE/ FCNR account of the account holder. I: Refund of share/ debenture subscriptions, application money/ earnest money/ purchase consideration made by the house building agencies / seller on account of bookings, together with interest if any (net of income tax payable thereon) provided the original payment was made out of NRE/ FCNR account of the account holder or remittance from outside India through normal banking channel and the authorized dealer is satisfied about the genuineness of the transaction.J: Current income like rent dividend, pension, interest etc. of NRIs provided Ads are satisfied that credit represents current income of non-resident account holders and income tax there on

has been deducted, paid or provided as the case may be.Permitted debits

A: Local disbursements.B: Transfer to NRE/ FCNR account of the same person or any other person who is eligible to maintain such accounts.C: Remittance outside India.D: Investments in shares/ securities or commercial papers of an Indian company or for purchase of immovable property in India provided such investment/ purchase is covered by the regulations made, or the general/ special permission granted by the RBI.

Repatriation facilities

Repatriation of deposit and interest is freely permitted.

PAYMENT OF INTEREST:

The interest on the deposits are accepted under the scheme shall be paid on the basis of 360 days a year. The interest on the FCNR (B) will be calculated as under;

A: For the purpose of deposits up to one year, at the principle rate without any compounding effect.

B: In respect of deposits for more than one year, at intervals of 180 days each and thereafter for remaining actual number of days. However the depositor will have the option to receive the interest on maturity with compounding effect.

C: Interest may be credited to a new FCNR (B) account or to existing new NRE/ NRO account in the name of account holder at his option.

FCNR DEPOSITS MATURING ON SATUREDAY/ SUNDAY/ HOLIDAY:

If the deposit is maturating on Saturday/ Sunday or on holidays, the bank shall pay interest at the originally contracted rate on the deposits amount for such Saturday/ Sunday, holiday or non working day intervening between the date of expiry and the date of payment of FCNR (B) deposit on succeeding working day. Account Operations:

The operations in the account may be allowed in the basis of Power of Attorney or Letter of Authority granted in favour of resident by the account holder, provided such payments are in accordance with the provisions of FEMA. Such operations are restricted to local payments only. However as per the recent guidelines from RBI, Letter of Authority/ PA holder can remit the funds abroad BUT ONLY TO THE AND IN THE NAME OF ACCOUNT HOLDER.

FACILITIES FOR RESIDENT INDIANS UNDER FEMA

PURPOSE: PERSONAL (PRIVATE VISIT) BASIC TRAVEL QUOTA (BTQ)

USD 10,000 or equivalent Per calendar year- Currency Notes USD 2000 per visit++ (No exchange for Nepal & Bhutan)

CONDITIONS:

A: No restrictions on no. of visits in a calendar year.

B: Exchange will be released on the basis of declaration given by traveler regarding the availment of forex in calendar year

C: If the foreign exchange is to be released by debit to RFC or EEFC account, exchange can be released exceeding USD 10,000.

D: If the travelers want more than USD 10,000 and the same not by debit to RFC or EEFC, prior approval of RBI is to be obtained through authorized person from whom exchange is to be drawn by giving reasons RBI has appointed nodal officer to dispose of such application on the same day. Request can be sent by email or fax to the concerned regional officer of RBI. Login to website www.rbi.org.in and contact concerned regional office.

E: Such exchange can be released 60 days in advance of the date of travel.

F: Payment against sale of exchange for travel abroad can be accepted by authorized person in cash if the rupee equivalent does not exceeds Rs. 50,000.

G: If the amount exceeds Rs. 50,000, the entire payment is to be accepted only by (i) crossed cheque drawn on applicant’s bank account. (ii) banker’s cheques/PO/ DD issued by debit to applicant’s account. (iii) if exchange is drawn on more than one occasion for a single visit, the

aggregate of rupee amount not to exceed Rs.50,000 for accepting in cash.

DOCUMENTS:

A: Passport. (Endorsement is optional at the request of traveller).

B: Air ticket: To verify the date of departure (exchange can be released 60 days in advance)

C: Declaration giving the details of journey and declaration that the total foreign exchange for visit during the calendar year (including proposed) does not

exceed limit.D: For A-2. This form is the one prescribed by RBI. Given as Annexure- A.2.

http://www.rbi.org.in/

ROLE OF BRANCH:

A: Branches when approached by the customer can guide on the above lines instantly without making him to visit foreign exchange centre. B: For remittance of rupee amount can issue PO with letter that has been issued

by debit to customer’s account and send the letter addressed to Overseas Br. or Foreign exchange center. If the customer guided on the above lines he can plan things very conveniently shall be happy with the services of the Bank.

++ Travellers proceeding to Iraq and Libya USD 5000. For travel to Iran, Russia and CIS countries: Entire exchange can be drawn in currency notes.

PURPOSE: BUSINESS VISIT

USD 25,000 or equivalent per visit Currency notes MAXIMUM USD 2000 per visit ++ (No exchange for Nepal & Bhutan)

CONDITIONS:


B: Exchange will be released on the basis of declaration giving the details of visit.

C: If the foreign exchange is to be released by debit to RFC or EEFC account, exchange can be released exceeding USD 25,000.




G: If the amount exceeds Rs. 50,000, the entire payment is to be accepted only by (i) crossed cheque drawn on applicant’s bank account. (ii) banker’s cheque/ PO/ DD issued by debit to applicant’s account. (iii) if


exchange is drawn on more than one occasion for a single visit, the aggregate of rupee amount not to exceed Rs.50,000 for accepting in cash.

DOCUMENTS:



C: Declaration giving the details of business visit.

D: For A-2. This form is the one prescribed by RBI. Given as Annexure- A.2.

ROLE OF BRANCH:

A: Branches when approached by the customer can guide on the above lines instantly without making him to visit foreign exchange centre. B: For remittance of rupee amount can issue PO with letter that has been Issued by debit to customer’s account and send the letter addressed to Overseas Br. or Foreign exchange center. If the customer guided on the above lines he can plan things very conveniently shall be happy with the services of the Bank.


PURPOSE: EMPOYMENT/ EMIGRATION

Not exceeding USD 100,000 or equivalent per visit Currency notes MAXIMUM USD 2000 per visit ++ (No exchange for Nepal & Bhutan)

CONDITIONS:

A: Exchange will be released on the basis of declaration giving the details of visit.

B: If the foreign exchange is to be released by debit to RFC or EEFC account, exchange can be released exceeding USD 100,000.

C: If the travelers want more than USD 100,000 and the same not by debit to RFC or EEFC, prior approval of RBI is to be obtained through

authorized person from whom exchange is to be drawn by giving reasons RBI has appointed nodal officer to dispose of such application on the same day. Request can be sent by email or fax to the concerned regional officer of RBI. Login to website www.rbi.org.in and contact concerned regional office.

D: Such exchange can be released 60 days in advance of the date of travel.

E: Payment against sale of exchange for travel abroad can be accepted by authorized person in cash if the rupee equivalent does not exceeds Rs. 50,000.

F: If the amount exceeds Rs. 50,000, the entire payment is to be accepted only by (i) crossed cheque drawn on applicant’s bank account. (ii) banker’s cheque/ PO/ DD issued by debit to applicant’s account. (iii) if exchange is drawn on more than one occasion for a single visit, the aggregate of rupee amount not to exceed Rs.50,000 for accepting in cash.

DOCUMENTS:

A: Passport. (Endorsement is optional at the request of traveller).B: Air ticket: To verify the date of departure (exchange can be released 60 days in advance)C: Declaration giving the details of employment or journey.D: For A-2. This form is the one prescribed by RBI. Given as Annexure- A.2.

ROLE OF BRANCH:

A: Branches when approached by the customer can guide on the above lines instantly without making him to visit foreign exchange centre.

B: For remittance of rupee amount can issue PO with letter that has been Issued by debit to customer’s account and send the letter addressed to Overseas Br. or Foreign exchange center. If the customer guided on the above lines he can plan things very conveniently shall be happy with the services of the Bank.


PURPOSE: MEDICAL TREATMNET


Not exceeding USD 100,000 or equivalent per visit Currency notes MAXIMUM USD 2000 per visit ++ (No exchange for Nepal & Bhutan)

CONDITIONS:


B: Exchange will be released on the basis of declaration that applicant is buying foreign exchange for medical treatment abroad, without insisting on any estimate from a hospital/ doctor in India/ abroad. Onus of furnishing the correct details in the application will remain with applicant. C: If the foreign exchange is to be released by debit to RFC or EEFC account, exchange can be released exceeding USD 100,000.




G: If the amount exceeds Rs. 50,000, the entire payment is to be accepted only by (i) crossed cheque drawn on applicant’s bank account. (ii) banker’s cheque/ PO/ DD issued by debit to applicant’s account. (iii) if exchange is drawn on more than one occasion for a single visit, the aggregate of rupee amount not to exceed Rs.50,000 for accepting in cash.

DOCUMENTS:



C: Declaration giving the details of business visit.



ROLE OF BRANCH:




PURPOSE: STUDIES (EDUCATION) ABROAD

The estimate given by an Institution abroad or USD 100,000 whichever is HIGHER per Academic YearCurrency notes MAXIMUM USD 2000 per visit ++ (No exchange for Nepal & Bhutan)

CONDITIONS:

A: Exchange will be released on the basis of declaration. The onus of furnishing the correct details in the application will remain with applicant who has certified the details of the transaction.

B: If the foreign exchange is to be released by debit to RFC or EEFC account, exchange can be released exceeding USD 100,000.

C: If the travelers want more than USD 100,000 and the same not by debit to RFC or EEFC, prior approval of RBI is to be obtained through authorized person from whom exchange is to be drawn by giving reasons RBI has appointed nodal officer to dispose of such application on the same day. Request can be sent by email or fax to the concerned regional officer of RBI. Login to website www.rbi.org.in and contact concerned regional office.

D: Such exchange can be released 60 days in advance of the date of travel.

E: Payment against sale of exchange for travel abroad can be accepted by authorized person in cash if the rupee equivalent does not exceeds Rs. 50,000.


F: If the amount exceeds Rs. 50,000, the entire payment is to be accepted only by (i) crossed cheque drawn on applicant’s bank account. (ii) banker’s cheque/ PO/ DD issued by debit to applicant’s account. (iii) if exchange is drawn on more than one occasion for a single visit, the aggregate of rupee amount not to exceed Rs.50,000 for accepting in cash.

DOCUMENTS:



C: Declaration giving the details of overseas studies. I-20 for USA Universities which provides detail estimate of expenses for one year.


ROLE OF BRANCH:




FOREIGN EXCHANGE RATES

I: FOFREIGN EXCHANGE

Foreign exchange, in simple terms means exchange of one currency with another, more particularly buying or selling of foreign currency against local currency

i.e. purchase or sale of currencies like USD, GBP, EUR, JPY, etc. against local currencies i.e. Indian rupees.

II: CROSS CURRENCY TRANSACTIONS

There are transaction where exchange is involved between two foreign currencies i.e. EUR against USD or GBP against USD, these are called cross currency transaction. These are mostly corporate related transactions.

III: EXCHANGE RATES

When we say of exchanging something against other i.e. USD against Indian rupees or EUR against USD, we need to have certain ratio for exchanging such currencies. For example, how much rupee to be paid to exporter for buying one USD or how much rupee to be recovered from importer for selling one USD. This ratio is nothing but exchange rate.

IV: WHO DECIDES THE RATE?

In liberalized environment, exchange rates are to be allowed to be decided by demand and supply forces. However, Central Bank of the country need to have watch on movements in exchange rates. In India, rupee is convertible on current accounts, through not on capital account. The exchange rates decided by market forces, while RBI allows policy of ensuring orderly market conditions. This means excess volatility in rate movements due to imbalance in demand and supply will be contained by RBI through market intervention.

V: MARKET INTERVENTION

We often read from economic newspapers about the intervention by central bank. What does it mean? Such intervention means nothing but correcting imbalances in the demand and supply. If supply of USD is more, naturally rupee will appreciate and rates will move i.e. market is opened at 44.50 then moves towards 44.45 ….44.40 ….44.35 as the sellers of USD are more than buyers. Such movements are normal in the Forex market, but if such movements are erratic RBI may start buying USD to cap the appreciation of rupee. Similarly if the demand for USD is more the rates would move in reverse direction. In that case RBI may sale USD to increase the supply of USD and correct the imbalance.

VI: FOREX RESERVES

Forex reserve is nothing but accumulation of foreign currency balances of the central bank i.e. in our case RBI. When RBI purchases USD from the market, it adds to kitty of foreign exchange reserves whereas when RBI sells USD it will result in decline in reserves.

VII: HOW BANK’S QUOTE RATE TO CUSTOMERS?

The banks which are authorized to deal in foreign exchange have a foreign exchange Dealing Room or Treasury Department. It is the function of dealing room to undertake buying and selling of foreign currencies in the market on account of bank’s customer based on the reporting by foreign exchange centers. i.e. for selling USD or any other convertible currency to customers, it will buy from the market and after buying USD or any other currency from customers it will sale the same in the market. In addition to this dealing room performs function like trading in various currencies, management of foreign currency funds, assets liability management in foreign currency, arbitrage operations, derivatives trading etc. But lets restrict here to functions relating to quoting of rates to customers.

VIII: CARD RATES

Every day in the morning, the dealing room, based on the prevailing market will prepare standard rate card for buying and selling of different foreign currencies for different purposes. Margins are loaded according to type of transaction taking into account the administrative cost involved for doing such transaction. These rates are applicable up to a certain limit of say USD 10,000 etc. This is to avoid frequent calls from FEX centers to dealing room asking rate for small value transactions there by incurring communication expenses as also time factor.

However for all transactions over and above cut off limit stipulated by the bank as also even for small value transactions where bank has agreed to charge lower than standard margin to high value/important customers, such exchange rates are quoted by dealers based on prevailing market rates. The card rates prepared by dealing room are sent every day in the morning to all foreign exchange center by email. Such card rate is also available on the VAN network on the dealer page.

IX: BANKER IS MARKET MAKER

At times customer ask for rates from their perspective i.e. a Traveler will ask for TC selling rates by saying that he wants to sell TC. We have to remember that though customer is right in saying that he is selling TC, we will apply TC buying rate as the bank is buyer and the rates are prepared on accounts of Bank’s role as market maker. This is as simple as what treatment we get when we go to grocery shop where we have to buy the things at SELLING RATE OF SHOP.

Rates are quoted by the bank to the customers for the different value dates. Value date is date on which actual exchange of currency takes place i.e. our Nostro account is debited or credited and corresponding flow of rupees takes place.

RATE FOR EXCHANGE OF CURRENCIES ……….. TAKES PLACECASH VALUE On the same day TOM Next working daySPOT After two working days FORWARD Future date which will be beyond spot date

For information of readers, a standard rate card is given below to have an idea about the different types of rate quoted by the bank to its customers. This card is not static but most dynamic which changes daily and even frequently in intra day depending upon the movements in the market.

IDEAL BANK LTD.FOREX TREASARY DATE: 10/05/07

TIME: 09:30 a.m.Rates are equivalent to one unit of Foreign Currency except for JPY where it is for 100 units of Foreign currency. Please obtain separate rate from Dealing Room for transaction over USD 10,000 of equivalent. Rates prevailing at 9.30 a.m.CURRENCY TT

SELLINGBILLS SELLING

TT BUYING

BILLS BUYING

INSTRUMENT PURCHASE

AUD 35.01 35.07 34.33 34.38 34.28CAD 41.19 41.27 40.39 40.40 40.33CHF 37.16 37.23 36.44 36.44 36.39DKK 7.76 7.77 7.60 7.61 7.59EUR 57.80 57.90 56.94 56.96 56.87GBP 84.32 84.47 83.24 83.26 83.13HKD 55.85 5.86 5.73 5.73 5.73JPY 40.83 40.90 40.13 4.14 40.08SEK 6.21 6.22 6.09 6.09 6.08SGD 28.93 28.98 28.36 28.37 28.32USD 45.11 45.19 44.67 44.68 44.61FOLLOWING RATES ARE AGAINST ONE UNIT OF FOREIGN CURRENCY

CURRENCY NOTES SELLING

CURRENCY NOTES BUYING

TRAVELLERS CHEQUE SELLING

TRAVELLERS CHEQUE BUYING

USD 45.55 44.00 45.35 44.20GBP 85.15 82.00 84.75 82.40EUR 58.40 56.10 58.10 56.35Please obtain rates for usance bills irrespective of amount from Dealing Room

WHERE TO USE

TT Selling

Bill SellingTT Buying

Bills buyingInstrument purchase

Clean outward remittances i.e. TT/DD for non import payment.For making import paymentInward remittance where Nostro account of the bank is already credited such as Inward TT cover received, FOBC realization etc.For export bills.Purchase of (FOBP) instruments. In this case interest is not loaded in the rate but is to be covered separately as per FEDAI guidelines.

FORWARD CONTRACTS: -

Forward contracts means buying or selling foreign currency at predetermined rate for future delivery on specified date or within specified period.

Foreign exchange contract is most widely used tool for management of exchange risk by companies, firms and individuals who are either going to receive foreign exchange in future or who plan to make payment in foreign currency in future.

The conversion from foreign currency to local currency or between two foreign currencies is often exposed to vagaries of exchange rate movements. As the effect of globalization, Indian markets are also now accustomed to wide fluctuations in the exchange rate of USD/ INR as also with other currencies. Even intra day movements are also quite substantial in no. of sessions.

Every businessman wants to make profit out of business activities rather than letting it exposed to the vagaries of market. As also individuals who want protection from possible exchange rate movements can use forward contracting as hedging instrument.

In Indian markets forward are available for USD/ INR, foreign currencies/ INR and foreign currency.

Banks offers different types of contracts as a) Fixed contracts and b) Option contracts which can be best explained in following: -

1) Fixed Forward Contract (i.e. Forward maturity on particular date for delivery): -

Deliverya) Forward Sale Contract (Sale of Currency by bank) – The delivery of

foreign currency is to be taken by the customer on fixed date as decided while booking forward contract.

Premium / Discount - Premium is to be paid by the customer or discount to be received up to fixed date.

b) Forward Purchase Contract (Purchase of Currency by bank) – The delivery of foreign currency is to be given by the customer on fixed date as decided while booking forward contract.

Premium / Discount – Premium is to be paid to the customer or discount to be received from the customer up to fixed date.

2) Option Forward Contract (i.e. Forward maturity in given period for delivery): -

Deliverya) Forward Sale Contract (Sale of Currency by bank) – The delivery of

foreign currency is to be taken by the customer between the specified period as decided while booking the contract. As per FEDAI guidelines this period can be maximum one calendar month.Premium / Discount – Premium is to be paid by the customer up to the last date of such option period or discount to be received up to first day of option period.

b) Forward Purchase Contract (Purchase of currency by bank) – The delivery of foreign currency is to be given by the customer between specified period as decided while booking contract. As per FEDAI guidelines this period can be maximum one calendar month.

Premium / Discount – Premium is to be paid to the customer up to the first day of option period or discount to be received from the customer up to last day of option period.

Letter of Credit: -In any trade whether it is domestic or international trade two important

ingredients are: (1) Transfer of goods and (2) Transfer of funds. However in practice it is easier said than done and more so in international trade where buyer and seller are located in different countries. They are governed by different regulations and customs of their respective country. Buyer and Seller hardly know each other more than on paper.

While risk is in built in both the trades’ i.e. domestic and international trade, it is more in international trade, as it is much easier to check the credentials of other party if the same is within country. However, despite such risk, global trade is booming. It is also adding to counter party risk i.e. failure of other party to fulfill its obligations, either for delivery of goods or payment as per agreed terms.

Methods of Settlement: -The following are the different methods of settlement universally used by

business community:

Method of Settlement From Buyers point of view From Sellers point of view

1) Advance Payment

Payment is made in advance along with the order.

Buyer is fully exposed to risk of non supply, late supply of goods. He parts Funds in advance and is fully at the mercy of seller.

Seller is fully protected from credit risk as he is getting money in advance.

Such advance payment is made for small value imports where supplier is highly reputed and established in the market or the buyer has excellent business relationship with the seller.

2) Import on Collection

Goods are dispatched by the seller and documents are sent through the bank.

In this method of settlement, buyer is more comfortable as he is assured of dispatch of goods before party the money.

Seller is running risk of non payment by the buyer. As the goods are already dispatched and if the buyer doesnot retire the documents he will have to incur costs for re-import of goods.

This method is used for imports where buyer is highly reputed and established in the market or the seller has excellent business relationship with the buyer.

3) Open Account

It is used in international trade for transactions between parties who are having long standing relationship like collaboration etc.

Very convenient and cost effective. It is so because, Documents are exchanged directly and the payments made as per convenience of buyer, also minimum bank charges are involved.

Running credit risk but this method is resorted to very sparingly with buyers having high reputation or long-established relationship.

4) Letter of Credit

Shipment is effected as agreed between buyer and seller as also payment is settled as per LC terms.

Buyer is protected from the risk of non shipment of goods by the seller. He has option to stipulate the conditions in LC as the deems fit of course those should be acceptable to seller.

Seller is protected from the risk of non payment by the buyer. He has to ensure compliance of terms and conditions of LC and the payment is assured by the LC opening bank.

What is Letter of Credit (LC): -

LC mechanism is governed by Uniform Customs and Practice for Documentary Credit (UCPDC). LC means: -

Letter of Credit is an irrevocable undertaking on the part of the issuing bank to pay on presentation (in case of sight LC) or on due date (in case of usance LC) provided all the terms and conditions are strictly complied with. In other words, LC is an instrument issued by a bank at the request of an importer in which the bank promises to pay a beneficiary upon the presentation of documents specified in the LC.

An exporter of a country has agreed to supply some goods to a foreign company. But the foreign firm’s credit worthiness is not known to the exporter. To ensure payment of the goods to be supplied, the exporter asks the importer to obtain the LC in favour of exporter. The importer goes to a local bank, acceptable to the exporter and asks the bank to issue LC in the name of exporter. In this letter the bank agrees to honour the demand for payment resulting from an import promises to pay the bank, the required amount plus fees on mutually acceptable terms.

Documents required by the Letter of Credit –

Following are the documents to be presented to the bank before the payment of an LC –

a) Commercial Invoice of the goods exported.b) Details of banking arrangements.c) Details of product supplied.d) Charges to be paid such as freight, insurance, etc.e) The Bill of Lading.f) Consumer Invoice.

Bill of Lading – A control form for the goods issued by a common carrier to the exporter or to the bank issuing the LC. The possession of this document often establishes the ownership of goods.

Consumer Invoice – Consumer Invoice is a certification made by the country’s consul board, about the quantity and nature of goods. It is often required to assess the import duty and check other requirements of social clauses such as adherence to pollution control regulations.

Preshipment Export Finance: -

Preshipment Finance or packing credit means a finance provided by a bank to exporter for the purpose of execution of export order. This covers credit extended for purchase, processing, manufacturing, packing and forwarding of goods meant for export till the point of shipment. This is basically need based finance extended on the basis letter of credit in favour of exporter.

Bank can consider the request for packing credit from exporter holding letter of credit opened in his favour, unless lodgment of such letter of credit is specifically waived by the bank. At times manufacturer produces goods for export purpose, however does not sell the same in international market on his own but such goods are exported through the agencies like State Trading Corporation (STC) / Minerals and Metal Trading Corporation (MMTC) or other export houses.

Banks can grant packing credit to such manufacturer supplier through the letter of credit or export order is not in their name and an actual export is routed through STC / MMTC. While granting such packing credit bank has to obtain letter from the export house setting the details about the export order to be executed by the manufacturer with the undertaking that Export house would not avail packing credit against such portion of the order from their bankers.

Export credit can be granted to sub-supplier on the lines of those allowed to manufacturer supplier. However in this case buyer will open the letter of credit in favour of the Export house / Trading house, whose bank in turn will open inland LC in favour of sub-supplier specifying the goods to be supplied to the export house against LC received by him as part of export transaction.

Period of Pre-shipment Advance:

The packing credit advance is basically need based working capital finance. The period of packing credit is to be decided having regard to the various relevant factors like manufacturing cycle i.e. procuring raw material, time taken for manufacturing, processing, packing, etc. so that the period is sufficient to enable the exporter to ship the goods. Thus the period of packing credit could be decided on case to case basis.

However as per the RBI guidelines if the advance is not adjusted by the submission of export document within 360 days from the date of disbursement, the advance will cease to qualify for concessive rate of interest to the exporter from the date of advance. Though maximum period for which packing credit could be 360 days, the RBI would be providing refinance for the pre-shipment credit only for a period not exceeding 180 days.

Post Shipment Credit: -

Post Shipment credit is the credit extended by bank to the exporter from the submission of documents till the realization of bills. Post shipment credit is basically bills finance. This type of credit bridges the gap between the time of shipment and the date of payment. Such financing is usually obtained through negotiation of bills of exchange drawn by the exporter and accepted by the importer.

Period of Post Shipment Credit –

Type of Bills Credit Period When will Bill become overdue

Sight bill The period of credit shall be the Normal transit period (NTP) as specified by FEDAI.

Based on NTP, the expected date for receipt of payment is calculated, which is called Notional Due Date or NDD. If the payment of bill remains unpaid on NDD it will be treated as overdue bill.

Usance bills In case of usance bills period of post-shipment credit for maximum period of 180 days from the date of shipment.

Based on usance period, the expected date for receipt of payment is calculated, which is called Notional Due Date or NDD. If the payment of bill remains unpaid on NDD it will be treated as overdue bill.

Crystallization: -In case export bills remains overdue, the same is to be crystallized (i.e.

freezing of foreign currency liability by converting it in Indian rupees) as per FEDAI guidelines on 30th day from NDD by applying current TT selling rate. As per the recent guidelines from FEDAI, any loss on such crystallization is to be recovered from the exporter as also profit is to be passed on to exporter.

Dealing Room Operations

Trading Room set up –

In appearance, the trading rooms of many major dealer institutions are similar in many respects. All have rows of screens, computers, telephones, dedicated lines to customers and to brokers, electronic dealing and broking systems, news services, analytic and informational sources, and other communications equipment. All have their affiliated “back offices”- not necessary located near by- where separate staffs confirm

transactions consummated by the traders and execute the financial payments and receipts associated with clearance and settlement.

The equipment and the technology are critical and expensive. For a bank with substantial trading activity, which can mean hundreds of individual trader and work stations to equip, a full renovation can cost many, many millions of dollars. And that equipment may not last long- with technology advancing rapidly, the state of the art gallops ahead and technology becomes obsolete in a very few years. But in a business so dependent on timing, there is a willingness to pay for something new that promises information that is distributed faster or presented more effectively, as well as for better communications, and more reliable systems with better back-up. These costs can represent a significant share of trading revenue. But profits will depend, not just on having it, but on how that information and technology are used. Each institution will have its own business plan, strategy, approach, and objectives.

The Different kinds of Trading Functions of a Dealer Institution -

A dealer bank or other institution is likely to be undertaking various kinds of foreign exchange trading – making markets, servicing customers, arranging proprietary transactions and emphasis on each will vary among institutions. Market making is basic to foreign exchange trading in the OTC market. The willingness of market makers to quote both bids and offers for particular currencies, to take the opposite side to either buyers or sellers of the currency, facilitates trading and contributes to liquidity and price stability, and is considered important to the smooth and effective functioning of the market. An institution may choose to serve as a market maker purely because of the profits it believes it can earn on the spreads between buying and selling prices.

Much of the activity in trading room in focused on marketing services and maintaining customer relationships. Customers may include treasures of corporations and financial institutions, managers of investment funds, pension funds, and high net worth individuals. A major activity of dealer institutions is managing customer business, including giving advice, suggesting strategies and ideas, and helping to carry out transactions and approaches that a particular customer may wish to undertake. Dealers also trade foreign exchange as part of the bank’s proprietary trading activities, where the firms own capital is put at risk on various strategies. Whereas market making is usually reacting or responding to other peoples requests for quotes, proprietary trading is proactive and involves taking an initiative.

Trading among major Dealers - Dealing directly and Through Brokers –

Dealer institutions trade with each other in two basic ways – direct dealing and through the brokers market. The mechanisms of the two approaches are quite different, and both have been changed by technological advances in recent years: -

1. Mechanisms of Direct Dealing –

Each of the major market shows a running list of its main bid and offer rates i.e. the prices at which it will buy and sell the major currencies, spot and forward, and those rates are displayed to all market participants on their computer screens. The dealer shows his prices for the base currency expressed in amounts of the terms currency. Both dollar rates and cross rates are shown. Although the screens are updated regularly throughout the day, the rates are only indicative to get a firm price, a trader or customer must contact the bank directly.

In very active markets, quotes displayed on the screen can fail to keep up with actual market quotes. Also the rates on the screen are typically those available to the largest customers and major players in the interbank market for the substantial amounts that the interbank market normally trades, while other customers may be given less advantageous rates. A trader can contact a market maker to ask for a two-way quote for a particular currency. Until the mid 1980’s the contact was almost always by telephone over dedicated lines connecting the major institutions with each other or by telex. But electronic dealing systems are now commonly used computers through which traders can communicate with each other, on a bilateral or one to one basis, on screens, and make and record any deals that may be agreed upon.

Example – If trader Raj were asking market maker Joshi to give quotes for buying and selling $10 million for Swiss francs, Raj could contact Joshi by electronic dealing system or by telephone and ask rates on “spot dollar-swissie on ten dollars”. Joshi might respond that “dollar-swissie is 1.4585-90;” or may be “85-90”, but more likely, just “85-90”, if it can be assumed that the “big figure” (i.e. 1.45) is understood and taken for granted. In any case, it means that Joshi is willing to buy $10 million at the rate of CHF

1.4590 per dollar. Joshi will provide his quotes within a few seconds and Raj will respond within a few seconds.

In a fast-moving market, unless he responds promptly in a matter of seconds, the market maker cannot be held to the quote he has presented. Also the market maker can change or withdraw his quote at any time, provided he says “change” or “off” before his quote has been accepted by the counter party. It can all happen very quickly. Several conversations can be handled simultaneously on the dealing systems, and it is possible to complete a number of deals within a few minutes.

When he hears the quotes, Raj will either buy, sell, or pass- there is no negotiation of the rate between the two traders. If Raj wants to buy $10 million at the rate of CHF 1.4590 per dollar, Raj will say “Mine” or “I buy” or some similar phrase. Joshi will respond by saying something like “Done-I sell you ten dollars at 1.4590” Raj might finish up with “Agreed-so long”. Each trader then completes a “ticket” with the name and amount of the base currency, whether bought or sold, the name and city of the counterparty, the term currency name and amount, and other relevant information. The two tickets formerly written on paper but now usually produced electronically are promptly transmitted to the “back offices” for confirmation and payment.

2. Mechanisms of trading through Brokers -

The traditional role of a broker is to act as a go between in foreign exchange deals, both within countries and across borders. Until the 1990s, all brokering in the OTC foreign exchange market was handled by what are now called live or Voice brokers. Communications with voice brokers are almost entirely via dedicated telephone lines between brokers and client banks. The broker’s activity in a particular currency is usually broadcast over open speakers in the client banks, so that everyone can hear the rates being quoted and the prices being agreed to, although not specific amounts or the names of the parties involved.

A live broker will maintain close contact with many banks, and keep well informed about the prices individual institutions will quote, as well as the depth of the market, the latest rates where business was done, and other matters. When a customer calls, the broker will give the best price available among the quotes on both sides that that he or she has been given by a broad selection of other client banks. In direct dealing when a trader calls a market maker, the market maker quotes a two-way price and the trader accepts the bid or accepts the offer or passes. In the Voice brokers market, the dealers have additional alternatives. Thus, with a broker, a market maker can make a quote for only one side of the market rather than for both sides. Also, a trader who is asking to see a quote may have the choice, not only to hit the bid or to take the offer, but also to join either the bid or the offer then being quoted in the brokers market.

Electronic Brokerage Systems have been introduced into the OTC spot market and have gained a large share of some parts of that market. In these systems,

trading is carried out through a network of linked computer terminals among the participating users. To use the system, a trader will key an order into his terminal, indicating the amount of the currency, the price, and an instruction to buy or sell. If the order can be filled from other orders outstanding, and it is the best price available in the system from counter parties acceptable to that trader’s institution, the deal will be made. A large order may be matched with several small orders. If a new order cannot be matched with outstanding orders, the new order will be entered into the system, and participants in the system from other banks will have access to it. Another player may accept the orders by pressing a “buy” or “sell” button and a transmit button.

Operations of the Foreign Exchange Department -

Typically the foreign exchange department of a bank will meet each morning, before trading starts, review overnight developments, receive reports from branches and affiliated outlets in market that opened earlier, check outstanding orders from customers, discuss their views toward the market and the various currencies, and plan their operations for the day. As market events unfold, they may have to adapt their view and modify their approach, and the decisions on whether, when, and how to do so can make the difference between success and failure. Each institution has its own decision making structure based on its own needs and resources. A chief dealer supervises the activities of individual traders and has primary responsibility for hiring and training new personal. The chief dealer typically reports to a senior officer responsible for the bank’s international assets and liability area.

The most actively traded currencies are handled by the more senior traders, often assisted by a junior person who may also handle a less actively traded currency. But the actions of any trader, regardless of rank, commit the banks funds. All need to be on their toes. Even a day trader whose objective may be simply to buy at his bid price and sell at his offer is in a better position to succeed if he is well informed, and can read the market well, see where rates may be headed, and understand the forces at play. He must have a clear understanding of his currency position, his day’s net profit or loss, and whether and by how much to shade his quotes in one direction or the other.

When a customer asks a market maker institution for the rates at which it is willing to buy and sell a particular currency, the response will be based on a number of factors. In deciding what bid and offer prices to quote, the trader takes into account the current quotations in the market, the rates at which the brokers are transacting business, the latest trends and expectations, whether the bank is long or short the currency in question, and views about where rates are headed. The trader is expected to be knowledgeable about both “fundamental” analysis and “technical” analysis. The trader also should be aware of the latest economic news, political developments, predictions of experts, and the technological position of the various currencies in the market.

In offering a quote for an option an option, a trader must consider complex factors. The trader will have loaded into his computer various formulas for estimating the

future volatility of the currency involved, along with spot and forward exchange rates and interest rates, so that he can very quickly calculate and quote the price of the premium when given the particulars of the transaction. On the top of all this, in setting quotes, a trader will take into account the relationship between the customer or counterparty and his institution. If it is a valued customer, the trader will want to consider the long-term relationship with that customer and its importance to the longer term profitability of the bank. Similarly, when dealing with another market maker institution, the trader will bear in mind the necessity of being competitive and also the benefit of relationships based on reciprocity. When asked for a quote, the trader must respond immediately, making an instantaneous assessment of these thousand and one factors.Back Office Payment and Settlements –

Every time a deal to buy or sell foreign exchange is agreed upon by two traders in their trading rooms, a procedure is set in motion by which the “back offices” of the two institutions confirm the transaction and make the necessary funds transfer. The back office is usually separated physically from the trading room for reasons of internal control- but it can be next door or thousands of miles away. For each transaction, the back office receives for processing the critical information with respect to the contract transmitted by the traders, the brokers, and the electronic systems.

The back offices confirm with each other the deals agreed upon and the stated terms- a procedure that can be done by telephone, fax, or telex, but that is increasingly handled electronically by systems designed for this purpose. If there is a disagreement between the two banks on a relevant factor, there will be discussions to try to reach an understanding. Banks and other institutions regularly tape record all telephone conversations of traders. Also, electronic dealing systems and electronic broking systems automatically record their communications. These practices have greatly reduced the number of disputes over what has been agreed to by two traders.

Payments instructions are promptly exchanged – in good time before settlement- indicating for example, on a dollar-yen deal, the bank and account where the dollars are to be paid and the bank and account where the yen are to be paid. On the value date, the two banks or correspondent banks debit-credit the clearing accounts in response to the instructions received. Since 1977, an automated system known as SWIFT (Society for the Worldwide Interbank Financial Telecommunications) has been used by thousands of banks for transferring payment instructions written in a standardized format among banks with a significant foreign exchange business.

When the settlement date arrives, the yen balance is paid into designated account at bank in Japan, and a settlement occurs there. On the US side, the dollars are paid into the designated account at a bank in the United States, and the dollar settlement from one bank account to another is made usually through Chips, the electronic payments system linking participating depository institutions in New York City. After the settlements have been executed, the back offices confirm that payment has indeed been made. The process is completed. The individual, or institution, who wanted to sell dollars for yen has seen his dollar bank account decline and his bank account in yen increase, the

other individual or institution who wanted to buy dollars for yen has yen bank deposit decline and his dollar bank account increase.