2. An Overview of the Foreign Exchange Module (2024)

2.1 Introduction

Foreign Exchange (FX) transactions involve one party purchasing aquantity of one currency in exchange for paying a quantity of another.

When goods are traded across boundaries, the selling and the buyingfirms prefer to receive/pay consideration in a currency of their choice.Firms as well as governments borrow foreign currency internationally.When they trade or borrow, multiple currencies come into play. Therehas to be a market that enables participants to buy and sell currenciesin such a way that they can convert the outflow and inflow into the currencyof their choice. Such currency trading takes place in an FX market.

The main participants of the FX Markets are central banks, commercialbanks, corporate players, speculators (such as investment banks, hedgefunds etc) and to a small extent retail customers.

Banks have dealing rooms where FX transactions are done by dealers.The deals may be struck either telephonically or through sophisticateddealing systems such as Reuters Kondor +. Smaller banks may also bookFX transactions through brokers.

Once a deal is struck, a deal slip is generated which contains basicdetails of the deal. These deal slips are then passed on to the treasuryback office for processing, accounting, settlement and messaging.

2.2 Setting up the System

Before you can process FX deals in Oracle FLEXCUBE, you need to maintaincertain data that will be used commonly by many deals. For example, youhave to specify the forward and discount rates for currencies, the defaultsettlement instructions for a customer, etc. Such data is maintainedin easily accessible static data tables. In the following tables youcan maintain the data that is required to process foreign exchange deals:

Forward Rates Maintenance table (forward rates for a currency tobe used for Rebate method of revaluation).
Discount Rates Maintenance table (the discount rates for a currencyto be used for NPV method of revaluation).
Netting Agreements table (where you can specify if you would liketo net the foreign exchange deals, which are to be settled on the sameday with a specific customer).
‘Customer Information Maintenance’ screen (to maintainthe clean and total risk for a customer).

2.3 Organizing Foreign Exchange Deals

In Oracle FLEXCUBE, you can classify the different foreign exchangedeals that you enter into as ‘products’. For example, ifyour bank enters into spot deals in GBP against USD, you can classifythis deal type as a product. When defining a product, you can definethe generic attributes of the deal type, such as:

The type of GLs that would be involved (Asset, Liability, ContingentAsset, Contingent Liability, etc.).
The GLs (under the GL Type) to which you would like to post the accountingentries.
The advices that you would like to generate for the benefit of thecounterparty.
If you would like to revalue deals and, if so, the method of revaluation.
If you would like to process brokerage, etc.

All deals in GBP-USD, for example, will acquire the generic attributesdefined for the GBP-USD product. However, you can allow modificationof certain attributes during deal processing.

2.4 Specifying the Brokerage

In Oracle FLEXCUBE, you can maintain a list of all the brokers withwhom you deal with in the Broker Master Maintenance table. In this table,for each broker, you can specify brokerage details such as the broker’sname and address; a unique code for the broker; the brokerage payablecurrency; whether you would like to book brokerage in advance or in arrears,etc.

When creating an FX product, you can opt to allow brokerage on dealsinvolving it. When processing a deal (involving a product for which brokerageis allowed), you can specify the broker involved. The brokerage details,defined for the broker involved in the deal, will automatically defaultto the deal. You can change the default brokerage values.

2.5 Defining Tax

Just as you can maintain brokerage details, you can define tax detailsin Oracle FLEXCUBE. Tax is calculated according to the ‘Tax Rules’that you maintain. A tax rule is built with the logic required to calculatetax. You can define the logic of tax rules to suit your requirement.For each tax rule, you can define the following:

The tax currency
The minimum tax amount
The maximum tax amount
The floor amount
The floor charge
The ceiling amount
If you would like to apply a rate or a flat amount
The basis amount, and so on

Upto six tax rules can constitute a tax scheme. When a tax schemeis linked to a product, tax will be calculated for deals involving theproduct according to the tax scheme. Oracle FLEXCUBE’s flexiblearchitecture allows you to waive the tax that is applied by default ona deal.

2.6 Tracking Limits

As part of the customer information maintenance in Oracle FLEXCUBE,you can define liability details for all your customers. You can definea hierarchy for tracking exposure — a customer company, its parentcompany, etc. For an FX deal, you can track clean and aggregate risks.

2.7 Settling FX Contracts

The seamless interface with the Settlements module of Oracle FLEXCUBEallows you to settle the foreign exchange deals (processed in OracleFLEXCUBE) through a funds transfer.

The Settlement Instructions for a foreign exchange deal can be capturedthrough four different screens (please refer the chapter on ‘Settlements’).Through these four screens, you can capture the following information:

Account details (details about the accounts that have to be eitherdebited or credited in your branch),
Party details (details about the various parties involved in thedeal).
Information required to be sent as part of messaging.

2.8 Retrieving Information Relating to FX deals

During the day, or at the end of the day, you may want to retrieveinformation relating to foreign exchange deals. This information canbe generated in the form of reports.

A report is information retrieved mostly in a printed format. However,you can direct a report to one of the following destinations:

The printer
The screen (as a display)
A spool file (stored as a spool file to be printed later)

The reports that you have spooled can be printed, or viewed, throughthe ‘Reports Browser’ screen. The following are the reportsthat you can generate in the foreign exchange module.

FX Tenor-wise Currency Position Report
FX Currency Analysis Report
Unconfirmed FX Contracts Report
FX Contract Daily Activity Report
FX Contract Overrides Report
FX Brokerage details Report
FX Daily Exception Report - Automatic Processing
FX Discounting Rate Report
Netting Agreement
Broker Confirmation Journal
Contract Maturity Due Report
Fund Transfer to Foreign Exchange Netting Report
FX to FT Netting Report
Process Exception Report