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FXC Critical of Shifting Compliance Burden to FX Dealers

The Federal Reserve Bank of New York’s Foreign Exchange Committee (FXC) has issued a letter criticising market participants for trying to shift the burden of enforcing internal policies and controls towards FX dealers.

In the letter, the FXC says that its member firms have noted that FX market participants occasionally send notices, letters and other communications (“authorisation letters”) to dealing firms “that limit and/or restrict the authority of individuals to submit orders or instructions, trade, invest or authorise settlement-related instructions on the firm’s behalf”.

The FXC adds: “Such letters attempt to shift the burden of enforcing compliance with internal policies and controls from the participant to the dealing firm, and are generally inconsistent with good practices in the wholesale foreign exchange market.”

In its letter, the FXC says that these authorisation letters – which may restrict the employees that are authorised to confirm trades or provide settlement instructions for particular products, currencies, or notional trade amounts – can sometimes require the dealer to indicate its acceptance of these limitations by returning a signed acknowledgement.

But it then says: “Such requirements, however, should be intended to validate individuals or online users of a particular dealing environment, rather than to represent the authority of individuals to perform narrowly defined tasks. While authentication is a key component of effective market, operational, legal, and reputational risk management, each market participant is responsible for ensuring that its own staff adheres to internal guidelines and authorisation restrictions. To send letters that request or would require that a firm monitor whether an individual has authority to act for an entity is contrary to common principles of dealing as principal in the foreign exchange market, and the spirit and intent of authentication.”

The FXC stresses that it has consistently taken the position that wholesale FX market participants are responsible for ensuring compliance with their own internal policies and procedures.

“A market participant may wish to reply to such authorisation letter or request, in the event that such participant has a policy and wishes to assert that policy, of not agreeing to such letters. These responses may take the form of a communication in which the participant affirms that its receipt of such authorisation letter does not impose any duty on it to monitor compliance with the restrictions set forth in the letter or impose any liability if it fails to do so,” says the FXC in its letter.

The Committee maintains that authentication remains an important element of risk management and says that it encourages market participants to employ secure automation to the extent possible to facilitate authentication in order to mitigate the risk of fraud and to administer controls, particularly when dealing via online portals or platforms.

The FXC concludes: “Letters and other documentation that purport to unilaterally shift the burden of enforcing compliance with internal policies and limitations to a market counterparty, or that may have that effect, however, are generally inconsistent with good practices in the wholesale foreign exchange market and, as a matter of law, may raise serious issues regarding enforceability.”

Galen Stops

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