A dealing room is a centralized establishment, usually of a commercial bank, which is willing to offer a two way dealing price for different currencies (and asset classes instruments) at all times even when they may not wish to deal, all but during the prescribed business hours. Functions of a dealing room – Basically a dealer is a service provider – to meet the requirements of his customers – to buy or sell currencies (and various other asset classes). He is also a part and parcel of the profit center – dealing room. Basically a dealer has to maintain two positions – funds position and currency (or asset) position.
Any successful dealing room operations manual will contain detailed deal process or standard operating procedures. The more clear this manual, the more enabled dealer leading to better operations – control, monitoring and management.
We furnish below a sample deal process detailing various steps involved.
Although identifying the appropriate instruments is a critical task, the treasury also has to implement that decision through its dealing process. This needs to be clearly documented both as a protection for treasury (in case, a dispute arises later) and as a means to evaluate the decision itself.
Deal process – The deal itself should be as standard as possible and must follow established deal procedures. The deal procedures should also outline how treasury should select the appropriate investment instruments
Authorize transactions – Once the appropriate instrument has been identified, an outline transaction itself should be authorized. Individual treasury team members will have their own deal limits, which may vary according to instrument type. Any authorization procedures should be followed carefully. Properly documented prior approval of counter-parties is very essential and this can save the institution and the dealer. An automated transaction should also be subject to an authorization procedure if it breaches a preset limit. Automated transactions should also be subject to regular and spot audit checks.
Quote – The dealing procedures should indicate how many quotes should be sought to identify the best, or a market benchmark, quote. This may depend on whether a published market rate is available. It will also state in which circumstances treasury can rely on data from a dealing platform or from its Reuters or Bloomberg screen or any other service provider. If the transaction is large relative to the particular market, treasury should avoid asking too many banks to quote because of the possible impact on that market. In these circumstances, treasury may choose to employ the services of an asset manager
Agree transaction – Once the preferred quote has been identified, someone with appropriate authorization should agree the transaction. The term of the agreement must conform to the terms of the mandate or other contract. It must not breach counter-party limits. The authorized dealer should produce a deal ticket, providing the full detail of the agreed transaction. This should include the details of any quotes as well as the relevant authorizations. These tickets are increasingly electronically generated and recorded
Confirm transaction – Once the deal ticket has been produced, it should be passed to the back office for confirmation. There should be a clear segregation of duties. This means no one party to the deal agreement (dealer or anyone who authorized the deal) should be involved in confirmations. In small companies with a small treasury, it may be necessary to use a member of the accounting department to perform confirmations. To confirm a transaction, the back office will ensure the details of the agreement on the company deal ticket match those sent by the counter-party. For standard transactions, these are increasingly automated.
Settlement instructions – After confirmation, the deal should be prepared for settlement. Detailed settlement instructions should be part of the any mandate or other contract. The back office should check that any changes to these instructions have been prepared by an authorized member of staff.
Reconciliation – Once the transaction has been settled, the back office team must reconcile all the relevant documentation for accounting and audit purposes. In today’s treasury, many of these activities can be automated. Most treasury management systems now include dealing modules, permit payments to be initiated and then create accounting and management reports.
Revaluation – Prudent accounting principles require dealing room positions are periodically marked to market. As long as the positions remain in the books of the bank, they are to be revalued or marked to market. There are standard set procedures for applying revaluation and also benchmark rates prescribed.
Backup systems – The dealing procedures will include reference to any back up processes in the event of failure in the preferred systems. These must be reflected in the agreement with counter-parties.
All the above activities are conducted through Front, Middle and Back Offices of a Dealing Room