Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 90-22 (IB)
July 3, 1990

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Policy Statement on the Use of "Points" in Settling Foreign Exchange Contracts

                      A practice unique to the brokered foreign exchange market is the use of "Points" as a way to settle disputed contracts.  "Points" are used in the brokered foreign exchange market as a means of dealing with problems arising from missed prices, from miscommunications, and/or from broker and dealer errors.  The use of "points" permits a disputed brokered transaction to be completed but defers settlement of the difference arising from it (measured in "Points") until these "points" are settled by - depending on the circumstances - arranging proportionately advantageous or disadvantageous future trades or by explicit payment.  Since "Points" are an informal accommodation between individual traders and brokers they are not normally included in the financial records of the institution on whose behalf the foreign exchange contract was completed and are often accomplished without formal management acknowledgment.

                      Ineffective policies, procedures and controls over disputed contracts by a financial institution can result in inaccurate records, misleading reports filed with regulatory and tax authorities, misapplication of funds, and potential violation of the institution's internal policies and federal criminal laws regarding gifts to bank personnel.  The U.S. bank regulatory agencies have found that the use of "Points" is a practice that can lead to significant abuse and is considered an unsafe and unsound banking practice.  Accordingly, each U.S. commercial bank, Edge or Agreement corporation, and branch, agency and commercial lending company associated with a foreign bank, subject to U.S. federal bank regulatory agencies' supervisory jurisdiction that deals in foreign exchange must develop, adopt, and implement detailed policies and procedures regarding disputed contracts. The written policy should detail the financial institution's approach to resolving disputed trades and should prohibit the use of points.  Adequate procedures should be developed that identify and control risk, and at a minimum should detail proper accounting, management and financial controls over disputed contracts.  The policy statement should be approved by senior management and reviewed by the board of directors in the case of a bank or the parent institution in the case of an office of a foreign bank or Edge corporation.

William A. Ryback
Deputy Associate Director


SR letters | 1990