3I0-012 Questions and Answers

Credit risk

Settlement risk

Liquidity risk

Legal risk

ensure that compliance is carried out efficiently

set limits on borrowing in the short-term markets to fund long-term lending

develop, evaluate, monitor and approve strategies related to risk due to imbalances in the asset and liability structure of the balance sheet

report to the board of directors

Substantial opportunity for gain and limited risk of loss

Substantial risk of loss and substantial opportunity for gain

Limited risk of loss and limited opportunity for gain

Substantial risk of loss and limited opportunity for gain

You will pay a net settlement amount

You will receive a net settlement amount

There will be an exchange of gross interest payments in 2 business days

There will be an exchange of gross interest payments in 3 months

0.470%

0.196%

0.500%

0.169%

credit spread tightening of the long term position

if the yield curve is inverted

if the yield curve becomes steeper

if there is a downward parallel shift in the yield curve

Receives compensation if a reference interest rate falls below an agreed level

Pays compensation if a reference interest rate falls below an agreed level

Receives compensation if a reference interest rate rises above an agreed level

Pays compensation if a reference interest rate rises above an agreed level

credit risk

interest rate risk

liquidity risk

currency risk

The offer side of the quotes it is making to other banks

The offer side of the quotes which it is receiving from other banks

The offer side of the interbank quotes it observes being made by prime banks

The offer side of the quotes it has actually borrowed at

SGD

PLN

GBP

NZD

Implicit nominal rate

Implied forward rate

Funding rate

Effective future rate

Semi-annual bond yield of 3.75%

Annual bond yield of 3.75%

Semi-annual money market yield of 3.75%

Annual money market rate of 3.75%

Information that could be damaging to a third party

Unsubstantiated rumours

Unsubstantiated information that they suspect may be inaccurate and damaging to a third party

Price-sensitive information

9.8141-9.8246

9.8108-9.8279

9.8098-9.8289

9.8151-9.8236

Reviewed Supervisory Factor

Required Stable Funding

Riskless Stable Funding

Riskless Supervised Funding

to run a zero gap

to hold more interest rate sensitive assets than interest rate sensitive liabilities

to reduce the size of the balance sheet

to hold fewer interest rate sensitive assets than interest rate sensitive liabilities

theft of information

damage to an organization through loss of its reputation or standing

market manipulation

loss incurred from the use of incorrect documentation

Unilateral collateral obligations to sovereign counterparties provide liquidity to banks.

Under Basel III commercial banks are most likely to incur lower costs to service their sovereign clients.

While banks usually do not call for collateral from sovereign counterparties, they must provide collateral for the offsetting hedge transactions which are undertaken with commercial counterparties.

Uncollateralised exposures to sovereign counterparties will not require additional regulatory capital to be set aside against potential credit losses

Bought CHF against JPY spot and sold JPY against CHF 3-month forward

Sold CHF against JPY spot and bought CHF against JPY 3-month forward

Bought CHF against JPY spot and sold CHF against JPY 3-month forward

Bought JPY against CHF 3-month outright

The broker is not obligated to reveal the connection provided Chinese Walls are in place.

The broker is not obligated to reveal the connection in the professional market.

The broker should advise the other counterparty of the connection.

The matter is covered in the Model Code.

SEK interest rates are higher than NOK interest rates

NOK interest rates are higher than SEK interest rates

NOK interest rates are higher than USD interest rates

SEK interest rates and NOK interest rates are converging

1.0352

1.0353

1.0347

1.0348

Borrowed CAD 20,000,000.00 at 1.06%

Lent CAD 20,000,000.00 at 1.11%

Borrowed CAD 20,000,000.00 at 1.11%

Lent CAD 20,000,000.00 at 1.06%

The other dealer is bound to reciprocate.

This is not in any way an enforceable or binding commitment.

The Model Code does not comment on dealing reciprocity.

It is common market practice to suspend reciprocity in periods of high volatility.

No deal is done and the broker should inform both counterparties accordingly.

The deal is done and the broker should inform both counterparties accordingly.

The matter should be resolved in consultation with senior management of the 3 institutions.

The ACI’s Committee for Professionalism will investigate and advise accordingly.

under reference

firm, but not necessarily in marketable amounts

firm, unless otherwise qualified

merely indicative

deduct points from the broker or adjust the brokerage bill accordingly

in some centres, ask either the central bank or some other neutral body to investigate and confidentially verify that there was support for the original price or rate

in some centres, ask the local ACI to investigate and confidentially verify that there was support for the original price or rate

insist that the broker discloses the name of the other counterparty

a 1x2 FRA short position

a 1- against 2-month buy and sell forward/forward FX swap

a 1- against 2-month sell and buy forward/forward FX swap

a 1- against 2-month forward/forward long position

0%

15%

20%

75%

the Canadian “Maple Leaf”

the South African “Krugerand”

the American “Gold Eagle”

the United Kingdom “Sovereign”

Credit Value Adaption

Call Value Adaption

Credit Value Adjustment

Counterpart Value Adjustment

1.4242

1.4232

1.4246

1.4237

1.4340

1.4343

1.4337

1.4335

EUR 50,015,416.67

EUR 50,016,219.18

EUR 50,016,444.44

EUR 50,016,958.33

the value date of the financial centre that is open

the next business day of the financial centre which is closed

the next business day when both New York and Tokyo are open

the previous business day when both New York and Tokyo are open

Selling a FRA for a similar notional amount

Buying a FRA for a similar notional amount

Selling a call option on the contract

Selling a put option on the contract

AUD 25,962,011.00

AUD 25,959,714.91

AUD 25,948,878.47

AUD 25,948,648.82

27th August

30th August

31st August

1 September

CD

FRA

BA

ECP

4.19%

4.25%

4.30%

4.31%

Management should monitor the form, frequency and cost of entertainment and gifts dealers receive, have a clearly articulated policy towards the giving/receipt of gifts and ensure the policy is enforced.

As gifts and entertainment may be offered in the normal course of business, employees can offer inducements to conduct business and solicit them from the personnel of other institutions.

Although management should not monitor the form, frequency or cost of entertainment/gifts dealers receive, they may have a policy towards the giving/receipt of gifts and ensure the policy is enforced.

Gifts or entertainment should never be offered in the normal course of business, and employees must never offer any inducements to conduct business, nor solicit them from other institutions.

XAU

XAG

XPT

XPD

ARP

ARS

ARA

AED

European-style option

American-style option

Bermudan option

Asian option

1.4523

1.4526

1.4513

1.4516

75%

100%

150%

350%

Management should ensure dealers fully understand the systems they use and dealers should read the manuals.

Management, dealers and vendors share responsibility.

Dealers are required to pass the ACI Dealing Certificate before being allowed to access electronic dealing platforms.

Given the wide range of electronic dealing platforms used by banks, it is the responsibility of the vendors to ensure individual users are adequately trained.

As you have heard the reports from other parties, you are entitled to pass them on to market news services.

As you have heard the reports from other parties, you are entitled to pass them on to other market participants.

You should not pass any information you know to be false.

You should contradict the reports.

The customer understands the structure of the transaction.

The customer has made its own assessment and independent decision to enter into the transaction and is doing so at its own risk and for its own account.

No fiduciary or advisory relationship exists between the parties, and all the information is has received is not to be construed as investment advice or a recommendation to transact.

All of the above.

Short USD 1.50 million at 112.60

Short USD 3.50 million at 111.75

Long USD 1.50 million at 111.10

Long USD 3.50 million at 111.55

Prior management approval has been sought.

They are executed within six months.

They are extended for not more than one year.

All of the above.

Duties and reporting lines.

Systems.

Career paths.

All of the above.

Dealers stick to market terminology in order to avoid the impression that they are offering an advisory or fiduciary role.

Dealers clarity what is being proposed rather than using any terminology that could be misinterpreted.

Dealers restrict themselves to terminology listed and explained in Chapter 11 of the Model Code.

Dealers define complex terminology in the confirmation of a deal.

Does not regard this as a good practice.

Urge dealers to be bear this in mind, as this is common practice for capital market deals.

Does not comment on this matter.

Recommends that national ACI Associations deal with this according to their local customs.

The price of the underlying commodity at the time of the transaction

The price at which the transaction on the underlying commodity will be carried out if and when the option is exercised

The price the buyer of the option pays to the seller when entering into the options contract

The price at which the two counterparties can close-out their position

1.73%

1.75%

1.77%

1.80%

Credit institution

lnvestment bank

Corporate

All of the above

You should provide all reasonable assistance.

You should report the request immediately to senior management.

Do not get involved; you may be at risk.

There is no recommendation in the Model Code.

buy a strip of 0x6, 6x12, 12x18 and 18x24 FRAs

sell a strip of 0x6, 6x12, 12x18 and 18x24 FRAs

buy a strip of 6x12, 12x10 and 16x24 FRAs

sell a strip of 6x12, 12x18 and 18x24 FRAs

8th September next year

10th September next year

8th December next year

10th December next year

to extend the contract to the next business day

to shorten the contract to the previous business day

The two parties involved agree to a new maturity date.

There is no standard market practice. ACIs Committee for Professionalism decides the issue on a case-by-case basis.

12-month AUD rates are higher than 12-month NZD rates

12-month AUD rates are lower than 12-month NZD rates

Spot AUD/NZD will be higher by approximately 50 points in 12 months

The AUD yield curve is positive, whilst the NZD curve is negative

I buy the base currency at the bid rate.

I buy the base currency at the offer rate.

I buy the counter-currency at the offer rate.

I sell you the base currency at the bid rate,

Today

Tomorrow

After you make an irrevocable payment

On the spot value date

All investigation cases should be handled within the same day B. All investigation cases should be handled within 2 days

Investigation cases received before noon should be handled within the same day and those received after midday should be handled before noon the next day

Investigation cases received before noon should be handled within the same day and those received after midday within 24 hours

104.14

104.21

104.23

104.30

Sell and buy GBP/USD T/N

Buy and sell GBP/USD T/N

Sell GBP/USD spot, and sell and buy GBP/USD T/N

Buy GBP/USD spot, and buy and sell GBP/USD T/N

A purchase of a cap and a sale of a floor

A purchase of a floor and a sale of a cap

A purchase of a cap and a purchase of a floor

A sale of a cap and a sale of a floor

1.42%

1.39%

2.01%

4.21%

The parking of deals or positions with any counterparty is discouraged B. The parking of deals or positions with any counterparty should be forbidden

The parking of deals or positions should be subject to a clear policy laid down in writing by senior management

In jurisdictions where position parking is allowed, prior approval should be sought from the regulator

The same day they are dealt

Promptly

Within 24 hours of execution

Within an hour of execution

The tapes and other records should be kept until the transaction has been settled B. Firms should ensure that they comply with local privacy laws

Management should ensure that the installation and control of recording equipment complies with local legislation, including laws on data protection, privacy and human rights as well as the manufacturers minimum requirements

All front office personnel should have access to these tapes and records

the issuer of a payment for the relevant trade distinct from the counterparty

the issuer of a payment for the relevant trade identical to the counterparty

the recipient of a payment for the relevant trade distinct from the counterparty

the recipient of a payment for the relevant trade identical to the counterparty

A spot sale (purchase) and a forward purchase (sale)

A spot sale (purchase) and a forward sale (purchase)

An exchange of currencies on a date beyond spot and at a price fixed today

An exchange of currencies on a date beyond spot

Yes, it is allowed for sporting events.

Yes, it is allowed if no money is involved.

Although not prohibited, it is strongly discouraged.

It is allowed for purposes of charity.

if a principal refuses to honour the deal

no conditions are required; the broker is entitled to take positions

only if he can not find another counterparty for a name switching

brokers act only as intermediaries or arrangers of deals

Its strike price is higher than the current market price of the underlying commodity

If the current market price of the underlying commodity is higher than the strike price of the option

Its strike price is equal to the current market price of the underlying commodity

If the current market price of the underlying commodity is lower than the strike price of the option

The Head of Operations has the sole responsibility of ensuring the correctness and validity of the SSI set up.

SSIs should be stored and maintained in the bank’s general static data system.

Each institution should have a separate SSI team to prevent I minimise the potential risk of fraud.

SSI staff should be fully integrated within Operations to insure consistent and reliable settlement guidelines.

Dealing should only be allowed during normal trading hours.

It is not recommended that an unofficial close of business be specified for each trading day.

There should be clear written guidelines regarding the limit and type of deals that are permitted after normal hours or off-premises.

All after-hours and off-premises transactions must be dealt exclusively with the dealer’s personal mobile phones

...only at the discretion of the head of treasury.

...only at the discretion of the head of trading.

...as long a counterparty and issuer limit is in place.

... is not permitted.

a term the quoting dealer uses to caution the receiver of the quote that the price may have to be re-quoted at the receiver’s risk

the qualification that the rate quoted in the market may no longer be valid and requires confirmation before any trades can be agreed upon

the statement that the rates quoted by the broker are for indication only

an acknowledgement by the dealer receiving the quote that the rate may have to be re-quoted at the receiver’s risk

To cover losses incurred between variation margin payments

To exclude retail investors

To pay reserve requirements

To cover fees due to the clearing house

agree, since entertainment is a normal part of business

refer this to senior management

agree but insist on paying half the cost

agree, if the broker pays for the event but does not attend it

added to spot

subtracted from spot

a negative value

Insufficient information to decide

buying additional 30-year German Government bonds

selling futures contracts on 30-year German Government bonds

buying futures contracts on 10-year German Government bonds

exercising an early repayment option on a long-term senior borrowing

Thursday 27th June

Friday 28th June

Saturday 29th June

Monday 1st July

SEK interest rates are higher than NOK interest rates

NOK interest rates are higher than SEK interest rates

NOK interest rates are higher than USD interest rates

SEK interest rates and NOK interest rates are converging

Opening a positive gap

Going over-borrowed

Making a forward-forward loan

Taking a forward-forward deposit

that all telephone conversations (internal and external) be taped without informing counterparties

that only conversations undertaken by dealers and brokers should be recorded

that all conversations undertaken by dealers and brokers should be recorded, together with back office telephone lines used by those responsible for confirming deals or passing payments to other institutions

that only telephone conversations between dealers and brokers be recorded

1.4206

1.4215

1.4217

1.4225

The buyer

The to-party agent

A third-party guarantor

A central clearing counterparty

0.9849

1.0154

1.9759

0.5061

1.038579

1.038582

1.038418

1.038421

Banks should not ask brokers to disclose details of third party transactions unless they are between overseas principals.

Banks should not ask brokers to disclose details of third party transactions unless these transactions are already settled.

Banks should not ask brokers to disclose transactions between third parties in any circumstances.

Banks should not ask brokers for details of third party transactions unless senior management has approved.

overnight, tom-next and spot-next

maturities up to one week

maturity dates of less than one month

maturity dates of less than 10 days

The dealer should not reveal his future dealing intentions to his counterparty.

The dealer should make his intention to assign clear before transacting.

The dealer should agree the method of assignment before transacting.

The counterparty should specify whether or not assignment would be acceptable in negotiations.

are invalid

must be approved by senior management before confirmation

cannot be entered into without the approval of the local regulator

are not considered to have been done in normal conditions or normal market hours

Treasury bill

CD

ECP

Classic repo

an unavailability of a credit limit for the counterparty

a qualification stating that a transaction needs to be reconfirmed

the unacceptability of the counterparty’s name

a qualification stating that the rate quoted may no longer be valid and requires confirmation before any trades can be agreed

The dealer is entitled to provide the name of the original counterparty to the assignee.

The dealer is entitled to provide the name of the assignee to the original counterparty.

The dealer should seek the permission of the assignee before releasing the name to the original counterparty.

The dealer should seek the permission of the original counterparty before releasing the name to the assignee.

Bid/offer spread

Flow information

Relationships

All of the above

a swap

a cap

a swaption

a collar

both parties to the dispute are members of the ACI and agree to submit the dispute to the ACI

one of the counterparties requests the assistance of ACI’s Committee for Professionalism

the two counterparties are located in different financial centers

the amount in dispute is more than USD 100,000.00 or equivalent

A short put option + long call option at the same strike price

A long put option + short call option at the same strike price

A short put option + short call option at the same strike price

A long put option + long call option at the same strike price

The original rate of the transaction

The original rate of the transaction adjusted by the relevant forward points

The affected parties should agree to adjust the exchange rate according to the prevailing relevant forward mid swap points at the time the bank holiday is announced

The rate is open to negotiation by the two parties

The confirmation takes precedence as it is a written contract.

The matter will have to be submitted to arbitration in order to establish the mutual intent of the parties.

It depends on local law.

The verbal agreement is binding.