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Unnamed Counterparties Joint Letter

 

 

February 2004

 

Dear Market Participant,

 

The Foreign Exchange Committee and the Singapore Foreign Exchange Market Committee believe that the practice of trading foreign exchange on an unnamed basis, also referred to as undisclosed principal trading, presents an adverse risk to both individual foreign exchange market participants and the broader financial market.

 

Trading foreign exchange on an unnamed basis refers to the practice whereby an investment manager trades on behalf of a client without revealing its identity to the dealer in order to maintain client anonymity.  Such practices constrain a dealer’s ability to assess the creditworthiness of their counterparties and comply with “know your customer” and anti-money laundering rules and regulations.  These conditions expose dealers to clear and significant legal, compliance, credit, and reputational risks, as well as heighten the risk of fraud. 

 

While the Committees recognize fund managers’ commercial interest in maintaining client confidentiality, they jointly recommend that investment advisors and dealers alike implement measures to eliminate the practice of trading on an unnamed basis.  Specifically, investment advisors and foreign exchange intermediaries should develop a process to disclose client names to a dealer’s credit, legal, and compliance functions prior to the execution of foreign exchange trades.  In turn, dealers should establish procedures to ensure the strict confidentiality of the intermediary’s clients and restrict the disclosure of this information to the front office except in the event of default.  This is a commonly achieved practice in other markets through the use


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