Comptroller of the Currency

Administrator of National Banks

Foreign Exchange

Comptroller’s Handbook
(Section 813)
Narrative and Procedures - March 1990

I
Other Income Producing Activities
Foreign Exchange
(Section 813) Table of Contents

Introduction 1
Risks 1
Policy 6
The Market 12

Examination Procedures 17

Internal Control Questionnaire 25

Verification Procedures 32

Comptroller’s Handbook i Foreign Exchange (Section 813)

Foreign Exchange
(Section 813) Introduction
This section is intended to provide minimum background and procedural
guidelines to examiners responsible for evaluating a bank’s foreign currency
activities. Within individual banks, foreign currency money market and
exchange trading operations may be combined or completely separate with
regard to policies, procedures, reporting, and even dealing. However, they
ultimately must be viewed together to evaluate liquidity and to insure
compliance with overall bank objectives and risk management strategy. For the
sake of brevity, this section discusses both functions as if they were performed
by the same traders, processed by the same bookkeepers and managed by the
same officers. Close coordination is required among examiners performing the
foreign exchange, due from banks—time, nostro account, and funds
management functions.

Most importers, exporters, manufacturers, and retailers tend to let banks handle
their foreign exchange needs. They rely on banks to make and receive their
foreign currency payments, to provide them with foreign currency loans, to
fund their foreign currency bank accounts, and to purchase their excess foreign
currency balances. They may ask banks to provide such services for immediate
delivery, i.e., at spot (short-term contracts, perhaps up to 10 days), or they
might contract to buy or sell a specified amount of foreign currency for delivery
at a future date. In either instance, the rates for such services may be
established prior to the finalization of the commercial transactions, and the
related costs may be calculated and often passed on to the buyers.

Risks

In contracting to meet a customer’s foreign currency needs, by granting loans,

accepting deposits, or providing spot or forward exchange, a bank undertakes a
risk that exchange rates might change subsequent to the time the contract is
made. The bank, therefore, must turn to wholesale markets, principally other
banks, to acquire the cover necessary to protect itself against loss on such
contracts. The astute banker manages that risk by maintaining constant
surveillance over the following:

Net Open Positions. A bank has a net position in a foreign currency when its
assets, including spot and future contracts to purchase, and its liabilities,

Comptroller’s Handbook 1 Foreign Exchange (Section 813)

 including spot and future contracts to sell, in that currency are not equal. An
excess of assets over liabilities is called a net “long” position and liabilities in
excess of assets, a net “short” position. A long position in a currency which is
depreciating will result in an exchange loss relative to book value because, with
each day, that position (asset) is convertible into fewer units of local currency.
Similarly, a short position in a currency that is appreciating represents an
exchange loss relative to book value because, with each day, satisfaction of that
position (liability) will cost more units of local currency. (Examples of net open
position schedules appropriate for use in preparing the report of examination
appear below.)

Consolidated Foreign Exchange Position

May 4, 19XX
(amounts in thousands)
Assets/Purchases LiabiIities/Sales
U.S. $ U.S. $
Monetary Unit, Overnight Foreign Equivalent of Foreign Equivalent of
Limit and Description Amount Local Currency Amount Local Currency
Book Value Book Value
Deutschemark ($3,000M)
Ledger Accounts 563,437 239,461 645,013 274,310
Spot Contracts 23,502 9,802 15,973 6,709
Forward Contracts 790,250 331,905 712,533 296,342
Financial Swaps (a) 239,912 100,097 246,131 104,977
1,617,101 681,265 1,619,650 682,338
Net Position (short) 2,549 1,073
Canadian Dollars ($6,000M)
Ledger Accounts 1,016,076 1,017,525 1,029,835 1,030,057
Spot Contracts 330,021 328,972 216,225 217,246
Forward Contracts 1,202,013 1,203,226 1,301,279 1,302,522
2,548,110 2,549,723 2,547,339 2,549,825
Net Position (long) (b) 771 102
Swiss Franc ($250M)
Ledger Accounts (c) 31,768 11,932 36,052 13,571
Spot Contracts 1,526 593 2,566 969
Forward Contracts 11,174 4,274 6,545 2,521
44,468 16,799 45,163 17,061
Net Position (short) (d) 695 262
(a) Includes both forward purchases and sales and corresponding assets and liabilities. Excess liabilities over
assets represents hedging of interest receivable.
(b) Split position caused by failure of bank to properly revalue its nostro accounts on a regular basis. Corrected
during the examination.
(c) Does not include Swiss Franc 1,000M (US$ 386M) unhedged investment in a Swiss subsidiary and Swiss
Franc 573M (US$ 217M) unhedged investment in branch fixed assets. Unhedged term "long" position
approved by senior bank management.

Foreign Exchange (Section 813) 2 Comptroller’s Handbook

(d) Net overnight position in excess of established limit. Formally approved as a special situation by senior
management prior to the transaction.

Maturity Gaps. Exchange risk may exist, by virtue of maturity gaps, even
though the bank has no net open position (assets equaling liabilities). Gaps are
the result of unmatched forward maturities creating days or longer periods of
uneven cash inflows and outflows. For example, a maturity spread of a bank’s
assets, liabilities, and future contracts may reflect a prolonged period over
which substantial amounts of a particular currency will be received well in
advance of any scheduled offsetting payments (positive gap). The bank must
decide whether:

• To hold the currency in its nostro accounts.

• To invest or place it short-term.
• To sell it (spot or forward) for delivery at the time the gap begins and to
repurchase it (spot or forward) for delivery at the time the gap ends.
• To use any combination of those alternatives.

The converse situation, wherein the maturity spread reflects maturing shorter-
term liabilities or substantial cash outflows prior to maturities of offsetting
assets (negative gap), obviously involves liquidity implications which do not
exist in the positive gap. The bank must meet its obligations at maturity.
Therefore, it must have the ability to borrow the currency short-term or be in a
position to purchase (spot or forward) for delivery at the time the gap begins
and, perhaps, sell (spot or forward) for delivery at the time the gap ends. The
decision to close either gap when it is created, or leave it open until a later
date, is determined by analyzing the money market interest rates, as well as the
difference (the swap rate) between any applicable spot and forward, or two
forward, exchange rates. The loss exposure, or profit potential, for the bank is
measured by the anticipated, or actual, movement in the swap rate between the
time the gap is created and the time it is closed. The interrelationship between
interest rates and the swap rate as well as the conversion of the swap rate to an
annual percentage rate and vice versa, are discussed in subsequent paragraphs.
(Examples of maturity distribution schedules appropriate for use in preparing
the report of examination appear below. Note that they balance to the open
position schedules above.)

Comptroller’s Handbook 3 Foreign Exchange (Section 813)

 Maturity Positions
May 4, 19XX
(amounts in thousands)
Deutschemark Swiss Franc Canadian Dollar
Maturity Net Cumulative Net Cumulative Net Cumulative
May 5 235 235 108 108 588 588
6 -200 35 -25 83 -36,591 -36,003
7 -11,639 -11,604 -722 -639 -35,295 -71,298
8 -11,604 -639 25,377 -45,921
9 5,384 -6,220 20,246 19,607 65,477 19,556
10 -6,220 19,607 19,556
11 -6,220 19,607 19,556
12 -41,111 -47,331 (a) 2,489 22,096 -65,959 -46,403
13 40,460 -6,871 -8,131 13,965 3,332 -43,071
14 15,108 8,237 -28,383 (b) -14,418 13,350 -29,721
15 14,240 22,477 -14,157 -1,001 -30,722
16 2,260 20,217 -14,157 -272 -30,994
17 20,217 -14,157 -30,994
18 20,217 -14,157 -30,994
19 -1,824 18,393 -14,157 2,218 -28,776
20 -14,988 3,405 6,003 -8,154 35,589 6,813
21 37,770 41,175 (a) 15,920 7,766 4,190 11,003
22 -20,361 20,814 7,043 14,809 -4,930 6,813
23 3,015 23,829 14,809 -4,767 1,406
24 23,829 14,809 1,406
25 23,829 14,809 1,406
26 23,829 14,809 1,406
27 20,382 44,221 -24,477 -9,668 -34,562 -33,156
28 -11,600 32,621 -222 -9,890 10,041 -23,115
29 32,621 -9,890 3,075 -20,040
30 -82,367 -49,746 (a) -3,783 -13,683 -39,935 -59,975
31 -49,746 (a) -13,683 -59,975
June 17,653 -32,093 2,636 -11,047 37,578 -22,397
July 9,345 -22,748 6,141 -4,906 (b) -27,599 -49,996
Aug -3,209 -25,957 8,133 3,227 9,216 -40,780
Sept 22,504 -3,453 4,779 8,006 -32,125 -72,905
Oct 966 -2,487 -6,799 1,207 70,205 -2,700
Nov -3,042 -5,529 5,640 6,847 -6,543 -9,243
Dec 13,266 7,737 6,847 -8,531 -17,774
19X1 -11,944 -4,207 -7,542 -695 21,582 3,808
19X2 800 -3,407 -941 2,894
19X3 858 -2,549 750 3,644
19X4 -2,617 1,027
After -256 771
Summary: Continuous cumulative Continuous cumulative Continuous cumulative
negative gap from 5/30/XX negative gap from 5/27/XX negative gap from 5/27/XX
to 9/30/XX, ascending to to 8/13/XX, ascending to a to 11/17/XX, ascending to
a high negative figure of high negative figure of a high negative figure of
DM72.71MM on 6/9/XX. (a) SF27.7MM on 7/14/XX. (b) C$77.6MM on 10/1/XX.
(a) Cumulative maturity gap in excess of the DM 40,000M established limit. Corrected May 7, 19XX.
(b) Net daily maturity gap in excess of the SF 25,000M established limit. Special situation approved by senior

Foreign Exchange (Section 813) 4 Comptroller’s Handbook

 division management.

Although controlled and monitored by senior management, day-to-day

supervision of net positions and maturity gaps is usually the responsibility of
the foreign exchange and money market traders and, perhaps, a line supervisor.
However, regardless of the care with which those functions are managed,
factors beyond the direct control of bank officers affect liquidity and exposure
to interest and exchange rate movement. Proper evaluation of such factors
requires close coordination and effective communication among the trading,
lending, correspondent relations, and economic research functions within the
bank. Some such exposure factors may be identified as follows:

Customer Creditworthiness and Delivery Capabilities. In entering into any

money market or foreign exchange transaction, the bank must be confident that
the counterparty possesses the financial soundness and liquidity required to
meet his or her obligations at maturity.

Money market assets expose the bank to credit risk on the entire amount of
their face value. The liquidity considerations arising from the unanticipated
non-repayment of those assets, particularly when proceeds are intended to meet
maturing liabilities presumably in the same currency, should be obvious. The
bank must satisfy its liability and again fund the asset, perhaps for an
undetermined period and at a relatively unfavorable rate.

Foreign exchange transactions may involve the same liquidity and rate risks as
money market transactions. However, the inherent credit risks are measured
differently. Foreign exchange transactions are normally considered to be void
of, or contain less than face value, credit risk except on the day(s) on which
they are settled. For example, every foreign exchange transaction involves the
exchange of one currency for another. If a counterparty is unable to deliver at
maturity the currency that it has contracted to sell, the bank must either dispose
of the currency it acquired for delivery under the contract or purchase the
currency that it had expected to receive and had, in turn, contracted to deliver
to a third party. If the bank had known in advance that the counterparty would
default, its exchange risk exposure would have been determined by the
difference between the contracted rates and the rates (spot or forward) at which
funds could be obtained between the time it received prior warning and the
maturity of the contract. Some bankers would attribute the rate difference to
credit risk, although others would maintain that no credit risk existed prior to
settlement date because there would be no need for funds to be paid or

Comptroller’s Handbook 5 Foreign Exchange (Section 813)

 exchanged. However, of importance is the fact that the bank in that instance
would not lose the full amount of the contract. If the bank had not received
prior warning, the liquidity considerations could obviously be more severe.
Also, the bank’s exposure (depending on whether it had or had not transferred
its payment prior to knowledge of default) would range from an exchange profit
(less nostro overdraft charges relating to the sale contract to the third party) to a
credit loss equal to the face amount of the defaulted contract. In that regard,
credit (delivery) risk is considered to be more severe when the home country of
one or both of the currencies being traded lies to the east of the bank. For
example (assume the bank is selling a European currency for U.S. dollars), most
European clearing mechanisms would not accept items for processing on the
same day if they were received after 12 noon. Thus, to meet European clearing
requirements on settlement (maturity) date, a United States bank must advise its
European correspondent by cable on the previous business day to charge its
account and credit the account of the counterparty. This is done without the
United States bank’s knowledge of whether the counterparty will advise (or be
open for business to advise) its U.S. correspondent to make a similar transfer,
e.g., to charge its account and credit that of the United States bank. If, in fact,
the foreign bank does not advise its U.S. correspondent to make the transfer,
the United States bank could lose the entire face amount of the contract. In
summary, the credit risk is generally limited to the difference between the
contracted rate and the prevailing spot rate except on maturity date when the
possibility of delivery against nonreceipt of counterpart funds could result in a
loss of the full face value of the contract.

Economic and Political Considerations. Political changes and/or adverse

economic trends within a country are likely to be accompanied by shifts in
policies which often affect such factors as interest rates, investment levels,
capital flows, overall payments balances, and foreign exchange reserves. Such
policies, whether based on economic necessity or changing attitudes, might
affect the availability of exchange to counterparties or the bank’s branches
within the country or even the convertibility of that country’s currency in other
markets. In either case, the exchange rates for that currency will be subject to
additional demand and supply considerations while sources of cover or
liquidity in that currency may vanish.

Policy

The relative importance of each of those risk determinants varies with each

Foreign Exchange (Section 813) 6 Comptroller’s Handbook

 currency traded and with the country of each counterparty. Senior bank
management must fully understand the risks involved in foreign exchange and
money market operations and must establish, in writing, its goals and policies
regarding those risks. Management must be able to defend logically the basis
upon which such policies are formed. It is imperative that responsible officers,
traders, clerks, and auditors understand, without exception, the intent as well
as the detail set forth in those directives.

At a minimum, policies should define dealing limits and reporting requirements

as well as accounting, adequate audit and control systems to provide proper
surveillance over those limits and exceptions thereto.

Limits must be established for overnight net positions in each currency.

Depending on the size of the limits and the manner in which they are
calculated, a smaller aggregate position limit for all currencies may be
desirable. An aggregate limit should not permit the netting of short against long
positions but should require that they be added to determine conformance to
that limit. Many U.S. banks presently are considering daylight (intraday)
position limits which are practical only if efficient computerization and input
systems are in effect to incorporate each trade into the appropriate currency
position at nearly the precise moment it is transacted. A common argument
against intraday limits is that traders will only take those daylight positions they
can cover by the end of the day. The solution to that argument might well lie in
the frequency with which overnight position limits are exceeded and the reason
for each excess position.

Gap (net inflow and outflow) limits must be instituted to control the risk of
adverse rate movement and liquidity pressures for each currency per each daily,
weekly, or bi-weekly future time frame designated in the bank’s maturity
reports. Such limits might range from stated absolute amounts per time frame
to weighted limits which emphasize increasing rate movement exposure
applicable to the relative distance into the future in which the gap appears.

Aggregate trading and placement limits must be established for each customer,
based primarily on the amount of business considered to be appropriate to its
creditworthiness and, secondly, on the volume of its foreign currency needs. In
addition, absolute sub-limits should be placed upon the amount of that
customer’s business that may be settled on one day. Should the customer be
unable to meet obligations on one day, the trader will:

Comptroller’s Handbook 7 Foreign Exchange (Section 813)

 • Be forewarned against delivery prior to receipt of customer funds on the
remaining contracts outstanding, and
• Have an opportunity to determine whether alternate cover must be obtained
to meet third party transactions that may initially have provided cover for
remaining transactions with that customer.

Some argue that it is difficult to monitor aggregate volume limits effectively and
nearly impossible to insure compliance with settlement limits for a large
number of customers. Nevertheless, there is no excuse for the absence of an
effective settlement limit program for at least those relationships that possess a
greater potential for late delivery or default. In such instances, the bank should
require counterparty transfer advices by cable rather than by mail.

Reports. Properly designed reports are the most important supervisory tool
available to management. They must be prepared in a concise, uniform, and
accurate manner and submitted punctually.

Management should receive daily net position reports for each applicable
currency. Normally, position reports should include all foreign currency
balance sheet items and future contracts as well as after-hour and holdover
transactions, with the exception of fixed assets and equity investments. The
hedging of those investments is usually a management decision outside the
normal responsibility of the traders. The reports should be prepared by the
foreign exchange and money market bookkeeping section and be reconciled
daily to the trader’s blotter. In the event that formal position reports cannot be
submitted at the end of the applicable business day, management must at least
be apprised of the trader’s estimated position at the end of each day,
particularly, before weekends and holidays.

Gap or maturity reports are essential to the proper management of a bank’s

liquidity in each foreign currency, and significant gaps may affect overall
liquidity. Those reports should reflect daily gaps for at least the first 2 weeks to
1 month. Beyond that time, gap periods of a maximum of 2 weeks each are
preferred. Gap reports, inherently, are accurate only for the day on which they
are prepared. Therefore, it is essential that banks have the capability to produce
detailed computerized reports daily. A variety of computerized management
summaries can then be generated with ease. Loans, deposits, and future
contracts as well as commitments to take or place deposits should be reflected
in the periods in which they are scheduled for rollover or interest adjustment.

Foreign Exchange (Section 813) 8 Comptroller’s Handbook

 In most instances, an additional report reflecting those items at final maturity is
desirable in analyzing the bank’s medium and longer-term dependence on
money market funding sources.

Exception reports must be generated immediately upon the creation of excesses,

to position limits, gap limits, and customer trading and settlement limits.
Excesses over any established limits should conform to overall policy guidelines
and should receive prior approval by the responsible supervisory officers. If
prior approval is not possible, evidence of subsequent supervisor concurrence
or disagreement as well as any corrective action should be available for audit
review and management records.

Revaluation and Accounting Systems. Such systems should accurately

determine actual as well as estimated future profits and losses and present them
in such a manner as to facilitate proper income analysis by management, bank
supervisory personnel, and the public. One system widely used by banks is
illustrated below. This system is capable of presenting separately, each of the
following:

• Actual realized profit or loss as determined by applying current spot rates to

balance sheet accounts as well as contracts of very near maturities.
Adjustments to the local currency book values would either be allocated and
posted to each of the applicable local currency ledger accounts or, for short
interim periods, be charged to a separate “foreign exchange adjustment”
account with an offset to P&L.

• Unrealized (estimated future) profit or loss on future transactions as

determined by applying the appropriate forward rates to the net positions
reflected for each future period appearing in the bank’s gap or maturity
reports. An “estimated profit (loss) on foreign exchange—futures” account
would be charged for the amount of the adjustment with an offset to P&L.
Provided that the amount of that adjustment is the difference between the
existing forward rates and the actual contract rates, each month’s entries
merely involve reversing the adjustment from the prior revaluation and
submitting the new figures.

The previous discussion may be more clearly understood when read in

conjunction with the typical bank revaluation worksheet below. The illustration
reflects a revaluation of the Deutschemark position above.

Comptroller’s Handbook 9 Foreign Exchange (Section 813)

 • As discussed in subsequent paragraphs entitled Financial Swaps and
Arbitrage, simultaneously contracted spot purchase and future sale
transactions performed to acquire foreign currency funds for temporary loan
or investment purposes should be segregated from regular trading activities
when determining revaluation profits or losses. Those “swap” profits
(discounts) or costs (premiums), as determined by the difference in local
currency value between the two contracted rates, are fixed. They are locked-
in at the time the forward side of the swap is completed. They should be
amortized or accreted over the life of the swap and must be properly
allocated to reflect the true yield on the particular investment for which the
swap was entered and the real income from loans and securities.

Revaluation Worksheet
May 4, 19XX
(amounts in thousands)
Net Market Book Profit
Deutschemark Assets Liabilities Position Rate Value Value or Loss

Ledger Accounts 563,437 645,013 -81,576 .39155 -31,941 -34,849 +2,908 (a)
Spot Contracts 23,502 15,973 +7,529 .39155 +2,948 +3,093 -145 (a)
Forward Contracts
Dec. 21 to Jan. 20 0 56,926 -56,926 .39230 -22,332 -21,986 -346 (b)
Jan. 21 to Feb. 20 100,415 111,420 -11,005 .39335 -4,328 -4,328 0 (b)
Feb. 21 to Mar. 20 56,246 49,457 +6,789 .38795 +2,635 +2,578 +57 (b)
Mar. 21 to Apr. 20 0 0 0 0 0 0 (b)
Apr. 21 to May 20 203,717 200,315 +3,402 .38810 +1,320 -177 +1,497 (b)
May 21 to Jun. 20 0 0 0 0 0 0 (b)
Jun. 21 to Jul. 20 98,426 0 +98,426 .38825 +37,648 +37,117 +531 (b)
Jul. 21 to Aug. 20 301,226 295,556 +5,670 .38830 +2,202 +2,475 -273 (b)
Aug. 21 to Sep. 20 37,427 39,256 -1,829 .39350 -718 +2,547 -3,265 (b)
Sep. 21 to Oct. 20 0 0 0 0 0 0 (b)
Oct. 21 to Nov. 20 222,705 185,716 +36,989 .38875 +14,379 +16,413 -2,034 (b)
Nov. 21 to Dec. 20 0 0 0 0 0 0 (b)
Dec. 21 and over 10,000 20,018 -10,018 .39420 -3,949 -3,956 +7 (b)
Total 1,617,101 1,619,650 -2,549 -2,136 -1,073 -1,063 (b)
(a) Allocated to appropriate balance sheet accounts with offset to P&L.
(b) Allocated as credit to unrealized loss account and debit to P&L.

The Financial Accounting Standards Board’s (FASB) Statement of Financial

Accounting Standards No. 8 prescribes a different approach to portfolio
valuation than that previously described. The principles and procedures set
forth in that statement are outlined as follows:

• Balance sheet accounts denominated in foreign currencies should be

Foreign Exchange (Section 813) 10 Comptroller’s Handbook

 translated and revalued using the following rates:

Foreign currency on hand Spot

Due from banks (nostro accounts) Spot
Investments in debt instruments Spot
Equity Investments:
Carried at cost Historical
Carried at current market price Spot
Loans and accrued interest receivable Spot
Bank premises and equipment Historical
Deposits, borrowings, and accrued interest payable Spot

• Forward exchange contracts should be revalued using the following rates:

Contracts that are part of a financial swap transaction Spot

or otherwise used to hedge balance sheet accounts,
such as loans or deposits
Contracts that are not categorized above Appropriate
forward rate

• Gains and losses, whether realized or unrealized, resulting from

revaluations of foreign currency transactions should be recorded as income
and expense. However, discounts and premiums on forward exchange
contracts that are part of financial swap transactions should be amortized
(accreted) to income over the life of the swap and should be considered as
an adjustment of the interest factor.

In analyzing both methods, at least one significant difference is apparent. The

FASB method requires that financial swap related assets, liabilities, and future
contracts be revalued at spot rates so that those assets and liabilities may be
reflected in the balance sheet at their current market values. As a result, the
local currency carrying values of those assets and liabilities would be adjusted,
at each revaluation, to values that would normally differ from their already
contracted liquidation values.

Analysis of the revaluation working papers generated by either method should

permit the same convenient approaches to evaluation of earnings and
identification of accruing losses in the forward book as are described in step 17
of the examination procedures in this section. It is conceivable, however, that
this convenience could be lost in a fully computerized revaluation system using

Comptroller’s Handbook 11 Foreign Exchange (Section 813)

 the FASB method.

Departmental Organization and Control. It is imperative that there be a

distinct separation of duties and responsibilities between the trading and the
accounting and confirmation functions within the department. The many
opportunities for greater bank profit or personal financial gain, whether by
speculating beyond loosely controlled limits, concealing contracts because of
poor confirmation procedures, or by simple fraud, may be too tempting even to
the most trusted employees. Periodic audits and examinations are no substitute
for sound continuing safeguards, and the numerous guidelines in the Internal
Control Questionnaire in this section cannot be overemphasized.

Supervision of Branches and Subsidiaries. Whether a bank maintains central

control over all foreign exchange and money market activities at the head office
or elects to decentralize that control, the policies, systems, internal controls,
and reporting procedures should not differ among separate offices within the
bank.

In either case, the bank should be apprised of its worldwide positions by daily
summary reports. Detailed net position and maturity gap reports should be
received periodically in order to prepare consolidations, as required, and to
monitor individual unit trading volume and funding methods. Information
provided in the Treasury Department monthly foreign currency reports is
adequate for the preparation of reports of examination and can be adapted
easily to reporting for currencies other than those specified in the reporting
instructions.

Federal Financial Institutions Examination Council Uniform Guideline. The

OCC adopted the “Uniform Guideline on Internal Control for Foreign Exchange
in Commercial Banks” on June 11, 1980. This guideline establishes minimum
standards for documentation, accounting, and auditing for foreign exchange
operations of banks supervised by the OCC, the Federal Deposit Insurance
Corporation, and the Federal Reserve System. The minimum standards adopted
either have been incorporated into the Foreign Exchange Internal Control
Questionnaire or are already included in the Handbook sections on Internal
Control, Internal and External Audits, and Working Papers.

The Market

Foreign Exchange (Section 813) 12 Comptroller’s Handbook

 Banks may fund their foreign currency activities through either money market
transactions or foreign exchange transactions, or both. Money market
instruments exist in a variety of forms and under a number of different names.
However, each of them can be categorized as a type of deposit, loan, or
borrowing and are all specifically covered in other sections of this handbook.
Therefore, only market considerations most applicable to foreign exchange are
discussed here.

Spot Exchange. Although the spot market typically refers to the purchase or sale
of foreign exchange for delivery in 2 business days, many U.S. banks consider
transactions maturing in as many as 10 business days as spot exchange. The
latter definition is used generally to facilitate revaluation accounting policies
and to initiate final confirmation and settlement verification procedures on
future contracts nearing maturity.

The spot rate for any particular currency might be determined strictly by the bid
and offered rates at which the central bank of that country will officially trade.
It might be pegged to another currency or group of currencies or allowed to
float freely in accordance with supply and demand. However, the rate may
change at any time based on many overriding economic, political, or market
factors.

Forward Exchange. Future exchange contracts are typically made for delivery in
1, 2, 3, and 6 months, i.e., actual deliveries are made in exactly the stated
number of months from the normal spot date. In most major currencies,
however, contracts can be made for “odd dates” or in the exact number of days
desired by the counterparty. “Odd date” rates can generally be determined by
interpolation between spot and forward rates or between two forward rates.

Forward exchange rates usually are quoted in terms of their premium or

discount over spot. Though they move with fluctuations in the spot rate, the
amount of the premium or discount (the swap rate) is determined by the net
accessible interest rate differential existing between the two countries, e.g., the
difference in interest rate levels further adjusted for reserve requirements and
other cost factors. The currency of the country in which interest rates are higher
will sell at a forward discount relative to the currency of the lower interest rate
and vice versa. For example, if the net accessible interest rate in a country were
higher by 3 percent per annum than that in the United States, and the spot rate
for that currency was U.S. $2.4000, then the forward discount normally would
be $.0720 per year (2.4000 x .03), or $.0060 per month. Should the forward

Comptroller’s Handbook 13 Foreign Exchange (Section 813)

 discount move from the 60 points per month, there will immediately be an
opportunity for arbitrage through a financial swap.

Financial Swaps. A financial swap is the combination of a spot purchase or sale

against a forward sale or purchase of one currency in exchange for another. It is
merely trading one currency (lending) for another currency (borrowing) for that
period of time between which the spot exchange is made and the forward
contract matures. The swap is the simple identification of one transaction
contracted at the spot rate with another contracted at the forward rate to
establish the exchange cost or profit related to the temporary movement of
funds into another currency and back again. That exchange (swap) profit or cost
must then be applied to the rate of interest earned on the loan or investment for
which the exchange was used. For example, the true yield of an investment for
90 days in United Kingdom Treasury bills cannot be determined without having
considered the cost or profit resulting from the swap needed to make pounds
sterling available for that investment. By the same token, the true trading profits
or losses generated by the trader cannot be determined if financial swap profits
and expenses are charged to the exchange function rather than being allocated
to the department whose loans or investments the swap actually funded.

Arbitrage. As it pertains to money markets and foreign exchange, arbitrage may

take several forms. The creation of an open position in a currency in
anticipation of a favorable future movement in the exchange rate, in addition to
being speculative, is sometimes referred to as arbitrage in time. Buying a
currency in one market and simultaneously selling it for a profit in another
market is called arbitrage in space. Slightly more complicated is the practice of
interest arbitrage that involves the movement of fund from one currency to
another so they may be invested at a higher yield. The real yield advantage in
such a situation is not determined merely by the difference in interest rates
between the two investment choices, but rather, by subtracting the cost of
transferring funds into the desired currency and back again (the swap cost) from
the interest differential. For example, in the situation described under Forward
Exchange, there is no arbitrage incentive involved in “swapping” from dollars
into the other currency at a 60 point per month discount (swap cost) which
exactly offsets the 3 percent gain in interest. However, should the swap rate
move to 40 points per month (or 480 points per year), the investment might
become attractive. This can easily be tested by converting the swap rate to an
annual percentage rate

Foreign Exchange (Section 813) 14 Comptroller’s Handbook

 Discount or Premium x 360 x 100
Spot rate x No. of days of future = % P.A.
contract

.0040 x 360 x 100

2.4000 x 30 = 2% P.A.

which results in a true yield incentive of 1 percent, 3 percent less the swap cost
of 2 percent.

As discussed earlier, unless the bank’s accounting system can identify swap
costs or profits and allocate them to the investments for which they were
entered, both the earnings on those investments and the earnings upon which
the trader’s performance are measured will be misstated.

Options. Option contracts permit a bank to contract to buy from or sell to a

customer when that customer can only generally predict the dates between
which he or she must trade. The option contract specifies both dates, and the
rate cited is that which in the judgement of the trader at the time of making the
contract contains the least exposure for the bank. That type of contract is
commonly requested by commercial customers wishing to cover drafts drawn
under letters of credit denominated in foreign currency. Such contracts are
always risky since there is no way for the bank to acquire a precisely matching
cover.

Compensated Contracts. There are occasions when both parties are agreeable
to altering the terms of an existing contract. Such alterations should be
approved by an impartial bank officer. Operations personnel must be advised of
each compromise to avoid settlement in accordance with the original
instructions and terms.

Foreign exchange and money markets do not merely exist but must be created
by parties who are willing to engage in commercial and financial transactions
proposed to them by others. If a bank wishes to solicit such business, it must
be prepared to quote bid and offered rates of exchange or interest for a given
time period. The party requesting the rates has the option to buy or sell, deposit
or borrow, at the stated rates or decline to deal. If the quoting bank prefers only
to service its commercial customer’s needs and otherwise remain relatively
inactive, it will have to acquire cover for those transactions at another party’s
bid and offered rates compared to an active bank that has the advantage of

Comptroller’s Handbook 15 Foreign Exchange (Section 813)

 dealing more frequently at its own rates. In addition, active market participation
may enhance a bank’s ability to borrow. It is important that those factors be
considered in evaluating a bank’s trading volume and liquidity.

Foreign Exchange (Section 813) 16 Comptroller’s Handbook

Foreign Exchange
(Section 813) Examination Procedures
1. Complete or update the Foreign Exchange section of the Internal Control
Questionnaire.

2. Based upon the evaluation or internal controls and the work performed
by internal and external auditors (see separate program), ascertain the
scope of examination.

3. Test for compliance with policies, practices, procedures, and internal

controls in conjunction with the remaining examination procedures.
Also, obtain a listing of any deficiencies noted in the latest review done
by internal/external auditors from the examiner assigned “Internal and
External Audits,” and determine if appropriate corrections have been
made.

4. Perform appropriate verification procedures.

5. Obtain a trial balance, including local currency book values, of customer

spot and future contract liabilities by customer and by maturity, and:

a. Agree or reconcile balances to appropriate subsidiary controls and to

the general ledger.

b. Review reconciling items for reasonableness.

6. Using the appropriate sampling technique, select customers for

examination. If verification procedures have been performed, use the
same sample. (Refer to step 20 before performing steps 7 through 19.)

7. Prepare credit line sheets to include details below:

a. Customer’s aggregate foreign exchange liability in local currency

equivalents.

b. Customer’s assigned trading volume limit.

c. Transcribe book value equivalents of individual contracts (from the

Comptroller’s Handbook 17 Foreign Exchange (Section 813)

 trial balance obtained at step 5) in maturity order, indicating the
foreign currency amount of each. If contracts are voluminous,
summarize transcription to include:

• The average book value per contract.

• The combined book value amount, purchases plus sales, and date
of the largest single day’s settlement.
• The longest outstanding maturity.
• The total of all future contracts in each foreign currency.

d. Customer’s assigned daily settlement limit.

e. Frequency of recent overdrafts in current account and, if possible,

whatever reasonable identification can be made to late delivery of
prior foreign exchange contract maturities.

f. Past compliance with trading volume and settlement limits as

determined from review of liability ledger record.

8. Identify those contracts with counterparties who are affiliates of or

otherwise related to the bank, its directors, officers, employees, or major
shareholders, and:

a. Compare the contracted rates with available rates for the same
transaction date or with other contracts entered as of the same
transaction date for the same tenor.

b. Investigate any instances involving off-market rates.

9. Obtain from the examiner assigned “International Loan Portfolio

Management” the schedules on the following if they are applicable to the
foreign exchange area:

a. Delinquencies.

b. Shared national credits.

c. Interagency Country Exposure Review Committee credits.

Foreign Exchange (Section 813) 18 Comptroller’s Handbook

 d. Previously criticized loans (internally or by examiners).

e. Information on directors, executive officers, principal shareholders,

and their interests.

f. Any useful information resulting from the review of the minutes of

the foreign exchange and money market committee or any similar
committee.

g. Reports furnished to the foreign exchange and money management

committee or any similar committee.

h. Reports furnished to the board of directors.

i. A list of affiliated companies.

10. Transcribe or compare information from the above schedules to credit

line sheets, where appropriate.

11. Prepare credit line sheets for any foreign exchange customer not in the
sample which, based on information derived from the above, requires in-
depth review.

12. Obtain liability and other information on common borrowers from

examiners assigned to cash items, overdrafts, and loan areas, and,
together, decide who will review the customer relationships. Pass or
retain completed credit line sheets.

13. Analyze each customer relationship considering the guidelines set forth
in the international sections, as they pertain to:

a. Commercial loans for private and commercial counterparties.

b. Due from foreign banks—time for banking and financial

counterparties.

(Generally, a customer’s obligation to the bank under foreign exchange

contracts would not be classified. However, if a customer’s financial
condition is so severe, i.e., doubtful or loss, that its ability to meet its
foreign exchange commitments is questionable, the combined book value

Comptroller’s Handbook 19 Foreign Exchange (Section 813)

 of contracts, purchases plus sales, representing the largest single day’s
settlement should be appropriately criticized or classified.)

14. Review the most readily available record and/or source of spot exchange
rate movement vis-a-vis the local currency to determine which
currencies, if any, have experienced a substantial degree to appreciation
or depreciation over the recent past. (Give particular attention, in step
13, to the creditworthiness of those counterparties who have contracted
either to deliver appreciating currencies to, or purchase depreciating
currencies from, the bank. In the event of non-performance by a
counterparty that has agreed to (a) deliver an appreciating currency, the
bank’s cost to cover any offsetting sales contracts might be substantial,
or (b) purchase a depreciating currency, the bank might be forced to sell
the currency it had acquired for delivery at a substantial loss. As one
source for identifying such currencies, each monthly Federal Reserve
Bulletin provides a history of annual and monthly averages of certified
noon buying rates in New York for cable transfers.)

15. Obtain or prepare the following data (separately for each foreign
currency involved, and to include book value equivalents), as of the
examination date, to be used in performing subsequent examination
steps:

a. A list of subsidiary control ledger totals for all balance sheet and
memoranda general ledger accounts by account number and/or title.

b. A trial balance of all balance sheet asset and liability items by

maturity.

c. A trial balance of all spot and future exchange contracts by maturity.

d. Copies of the trader’s daily position sheets and/or reports.

e. Copies of the accounting department’s daily position sheets and/or

reports and reconcilements to the trader’s positions.

f. If not included in copies obtained under d and e, a detailed listing of

all holdover and after-hour transactions.

Foreign Exchange (Section 813) 20 Comptroller’s Handbook

 g. If not available as of examination date, copies of the accounting
department’s last maturity gap reports. (After analysis has been
performed, pass maturity gap reports, to include appropriate local
currency equivalents, to the “Funds Management” examiner.)

h. If not prepared as of examination date, copies of the last revaluation

worksheets.

i. All limit exception reports.

16. Prepare examination report net position and maturity schedules, and:

(Commitments to take or place foreign currency deposits must be

included in the maturity schedules in order that all anticipated cash
inflows and outflows are properly reflected. However, those items
should not be included in the net position schedules other than in
footnote form.)

a. Compare results to bank prepared net position and maturity gap

reports, if available for the same date.

• Footnote any material differences.

• Explain any deficiencies.

b. Compare results to established limits, and review exception approvals

thereto.

17. Check the most recent revaluation working papers and resultant
accounting entries to determine that:

a. Foreign currency amounts and book values were properly reconciled

to subsidiary ledger controls.

b. Rates used are representative of market rates as of revaluation date,

and

• If obtained from the traders, that they have been verified with
independent sources. (Daily, 10:00 AM, mid-point, spot and
future, New York interbank market rates for commonly traded
currencies are available as needed at each regional office or the

Comptroller’s Handbook 21 Foreign Exchange (Section 813)

 International Banking Activity Examinations, Washington, D.C.)

c. Arithmetic is correct.

d. Profit and loss results are separately recorded and reported to

management for:

• Realized profit or loss, i.e., that which is determined through the

application of spot rates.
• Unrealized (estimated future) profit and loss, i.e., that which is
determined through the application of forward rates.

e. Financial swap related assets, liabilities, and future contracts are

excluded from the normal revaluation process so that the results
identified in d. reflect more accurately the trader’s outright dealing
performance.

f. Financial swap related costs and profits are:

• Amortized over the life of the applicable swap.

• Appropriately accounted for as interest income and expense on
loans, securities, etc.

18. Review working papers for selected revaluations performed since last
examination, and test check as in step 17 above, and, if satisfied that
they are accurate:

a. Analyze combined realized earnings to determine that profits are

commensurate with risks taken.

b. Analyze monthly unrealized revaluation results (forecasts) to

determine that:

• The resulting amount for the last revaluation, if a loss, is not large.
• An increasing loss trend over previous revaluations does not exist.
(Although month-to-month variations are not uncommon, an
increasing unrealized loss trend could indicate that a trader is
caught in a loss position and is pursuing a notion that a negative
trend in the exchange rate for that currency will reverse and, if

Foreign Exchange (Section 813) 22 Comptroller’s Handbook

 combined with an ever multiplying increase in his or her volume,
might eventually repay his or her accumulated losses.)

19. Review the confirmation discrepancy log, and observe the confirmation
process to determine:

a. That incoming confirmations are delivered directly to the

confirmation clerk and that:

• Discrepancies are recorded.

• Discrepancies are reported to an appropriate officer and are
resolved promptly.

b. That outgoing confirmations are processed in compliance with

policies governing:

• Initial procedures.
• Follow-up procedures.
• The level of involvement by internal auditors in follow-up
procedures.

c. If the confirmation discrepancy log discloses counterparties which:

• Are often or consistently slow in confirming.

• Often or consistently make errors in confirmation preparation.

20. Determine compliance with laws, regulations, and rulings pertaining to

foreign exchange activities by performing the following for:

a. 12 CFR 20.5 — Monthly Consolidated Foreign Currency Report of

Banks and Federal Branches — Form FFIEC 035:

• Review for accuracy the most recently prepared monthly report.

• Select random bank prepared net position reports, and determine
whether they are being filed as required and are accurate.
(Be alert to instances in which net positions are generally large but
reduced as of the month-end reporting dates.)

21. Discuss with appropriate officer(s), and prepare appropriate report

summaries of:

Comptroller’s Handbook 23 Foreign Exchange (Section 813)

 a. Net position schedules.

b. Maturity gap schedules.

c. Frequent or sizeable excesses over any established limits.

d. Any limits deemed excessive relative to:

• Management’s policy goals regarding the nature and volume of

business intended.
• The bank’s capital structure.
• The creditworthiness of trading counterparties.
• Individual currencies for which limited spot and future markets
exist.
• Experience of traders.
• The bank’s foreign exchange earnings record.

e. The absence of any limits deemed appropriate in present and

foreseeable circumstances.

f. Customers whose obligations are otherwise previously classified or

intended to be criticized.

g. Foreign exchange contracts which, for any other reason, are

questionable in quality or ultimate settlement.

h. Violations of laws, regulations, or rulings.

i. Deficiencies in internal controls.

j. Other matters regarding efficiency and general condition of the

foreign exchange department.

22. Prepare a memorandum, and update the work program with any
information that will facilitate future examinations.

Foreign Exchange (Section 813) 24 Comptroller’s Handbook

Foreign Exchange
(Section 813) Internal Control Questionnaire
Review the bank’s internal controls, policies, practices, and procedures
regarding foreign exchange trading. The bank’s systems should be documented
in a complete and concise manner and include, where appropriate, narrative
descriptions, flowcharts, copies of forms used, and other pertinent information.
Items marked with asterisks require substantiation by observation or testing.

Policies

1. Has the board of directors, consistent with its responsibilities, adopted

written policies governing:

a. Trading limits, including:

• Overall trading volume?

• Overnight net position limits per currency?
• Intra-day net position limit per currency?
• Aggregate net position limit for all currencies combined?
• Maturity gap limits per currency?
• Individual customer aggregate trading limits, including spot
transactions?
• Written approval of excesses to above limits?

b. Segregation of duties among traders, bookkeepers, and confirmation

personnel?

c. Accounting and revaluation procedures?

d. Management reporting requirements?

2. Do policies attempt to minimize:

a. Undue pressure on traders to meet specific budgeted earnings goals?

b. Undue pressure on traders, by account officers, to provide preferred

rates to certain customers?

Comptroller’s Handbook 25 Foreign Exchange (Section 813)

 3. Are traders prohibited from dealing with customers for whom trading
lines have not been established?*

4. Are all personnel, except perhaps the head trader, prohibited from
effecting transactions via off-premises communication facilities?

5. Is approval by a non-trading officer required for all compensated

transactions?

6. Do credit approval procedures exist for settlement (delivery) risk either

in the form of settlement limits or other specific management controls?

7. Does a policy procedure exist to insure that, in the event of an uncertain

or emergency situation, the bank’s delivery will not be made prior to
receipt of counterpart funds?

8. Do the above policies apply to all branch offices as well as majority-

owned or controlled subsidiaries of the bank?

9. Does the bank have written policies covering:

a. Foreign exchange transactions with its own employees?

b. Foreign exchange transactions with members of its board of directors?

c. Its traders’ personal foreign exchange activities?

d. Its employees’ personal business relationships with foreign exchange

and money brokers with whom the bank trades?

10. Are the above policies understood and uniformly interpreted by all
traders as well as accounting and auditing personnel?*

Trading Function

11. Is a trader’s position sheet maintained for each currency traded?

12. Is a trader’s position report received by management at the end of each

Foreign Exchange (Section 813) 26 Comptroller’s Handbook

 trading day?*

13. Does the trader’s position report reflect the same day’s holdover and
after-hours transactions?*

14. Are trader’s dealing tickets pre-numbered?

a. If so, are records and controls adequate to ascertain their proper

sequential and authorized use?

b. Regardless of whether or not pre-numbered,*

• Are dealing tickets time date stamped, as completed, or

• Are dealing tickets otherwise identified with the number of the
resultant contract to provide a proper audit trail?

Accounting and Reporting

15. Is there a definite segregation of duties, responsibility, and authority

between the trading room and the accounting and reporting functions
within the division and/or branch?*

16. Are contract forms pre-numbered (if so, are records and controls
adequate to insure their proper sequential and authorized use)?

17. Are contracts signed by personnel other than the traders?

18. Are after-hours or holdover contracts posted as of the dates contracted?*

19. Do accounting personnel prepare a daily position report, for each

applicable currency, from the bank’s general ledger, and:*

a. Do reports include all accounts denominated in foreign currency?

b. Are those reports reconciled daily to the trader’s position report?

c. Are identified or unreconciled differences reported immediately to

management and to the head trader?

d. Are all counterparty non-deliveries on expected settlements reported

Comptroller’s Handbook 27 Foreign Exchange (Section 813)

 immediately to management and to the head trader?

20. Are maturity gap reports prepared for liquidity and foreign exchange
managers at least bi-weekly to include:*

a. Loans and deposits reflected in the appropriate forward maturity

periods along with foreign exchange contracts?

b. Loans, deposits, and foreign exchange contracts (specify whether

reflected in the maturity periods in which they fall due or in which
they are scheduled for rollover ____________)?

c. Commitments to accept or place deposits reflected in the appropriate

maturity periods by both value and maturity dates?

d. All those items (specify whether as of the day on which they mature
or bi-weekly or monthly maturity periods ____________)?

e. All those items as of the day on which they mature, if necessary, i.e.,
in the event of a severe liquidity situation?

21. Does the accounting system render excesses of all limits identified at
step 1 immediately to appropriate management, and is officer approval
required?*

22. Are local currency equivalent subsidiary records for foreign exchange
contracts balanced daily to the appropriate general ledger account(s)?*

23. Are foreign exchange record copy and customer liability ledger trial
balances prepared and reconciled monthly to subsidiary control accounts
by employees who do not process or record foreign exchange
transactions?*

24. Do the accounting and filing systems provide for easy identification of
“financial swap” related assets, liabilities, and future contracts by
stamping contracts or maintaining a control register?

Confirmations

Foreign Exchange (Section 813) 28 Comptroller’s Handbook

 25. Is there a designated “confirmation clerk” within the accounting section
of the division or branch?

a. Incoming Confirmations:*

• Are incoming confirmations delivered directly to the confirmation

clerk and not to trading personnel?
• Are signatures on incoming confirmations verified with signature
cards for:
– Authenticity?
– Compliance with advised signatory authorizations of the
counterparty?
• Are all data on each incoming confirmation verified with file
copies of contracts to include:
– Name?
– Currency denomination and amount?
– Rate?
– Transaction date?
– Preparation date, if different from transaction date?
– Maturity date?
– Delivery instructions, if applicable?
• Are discrepancies directed to an officer apart from the trading
function for resolution?
• Is a confirmation discrepancy log or other record maintained to
reflect the identity and disposition of each discrepancy?
• Are telex tapes retained for at least 90 days as ready reference to
rates and delivery instructions?

b. Outgoing Confirmations:*

• Are outgoing confirmations mailed/telexed on the day during

which each trade is effected?
• Are outgoing confirmations addressed to the attention of persons
other than trading personnel at counterparty locations?
• Does the accounting and/or filing system adequately segregate
and/or identify booked contracts for which no incoming
confirmations have been received?
• Are follow-up confirmations sent by the confirmation clerk if no
corresponding, incoming confirmation is received within a limited

Comptroller’s Handbook 29 Foreign Exchange (Section 813)

 number of days after the contract is effected (if so, specify
_____________)?
• Is involvement by the auditing department required if no
confirmation is received within a limited number of days after the
transmittal of the second request referred to above (if so, specify
_____________)?
• Are confirmation forms sent in duplicate to customers who do not
normally confirm?
• Are return copies required to be signed?

Revaluations

26. Are revaluations of foreign currency accounts performed at least

monthly?*

a. Does the revaluation system provide for segregation of and separate

accounting for:

• Realized profits and losses, i.e., those which are determined

through the application of spot rates?
• Unrealized profits and losses, i.e., those which are determined
through the application of forward rates?

b. Are financial swap related assets, liabilities, and future contracts

excluded from the revaluation process so that the results identified in
a. above more accurately reflect the trader’s outright dealing
performance?

c. Are financial swap costs and profits:

• Amortized over the life of the applicable swap?

• Appropriately accounted for as interest income and expense on
loans, securities, etc?

d. Are rates provided by, or at least verified with, sources other than the
traders?

Other

Foreign Exchange (Section 813) 30 Comptroller’s Handbook

 27. Is the bank’s system capable of adequately disclosing sudden increases in
trading volume by any one trader?*

28. Do such increases require officer review to insure that the trader is not
doubling volume in an attempt to regain losses in his or her positions?

29. Does the bank retain information on, and authorizations for, all overdraft
charges and brokerage bills within the last 12 months?

30. Does an appropriate officer review a comparison of brokerage charges,

monthly, to determine if an inordinate share of the bank’s business is
directed to or handled by one broker?

Conclusion

31. Is the foregoing information an adequate basis for evaluating internal

control in that there are no significant additional internal auditing
procedures, accounting controls, administrative controls, or other
circumstances that impair any controls or mitigate any weaknesses
indicated above (explain negative answers briefly, and indicate
conclusions as to their effect on specific examination or verification
procedures)?

32. Based on a composite evaluation, as evidenced by answers to the

foregoing questions, internal control is considered ____________ (good,
medium, or bad).

Comptroller’s Handbook 31 Foreign Exchange (Section 813)

Foreign Exchange
(Section 813) Verification Procedures
1. Obtain control of all outstanding contracts and number them
sequentially so that they may be returned to the bank in the order in
which they were received, and:

a. Arrange them by currency for preparation of position worksheets for

proof to or comparison with:

• Foreign currency subsidiary ledgers.

• The general ledger.
• The bank’s position report as of the same date.
• Net position limits.
• Aggregate trading limits.

b. Arrange them by currency and by maturity for preparation of maturity

worksheets and for comparison with the bank’s maturity gap reports,
if available, as of the same date, and check for compliance with gap
limits.

c. Arrange them by customer and by maturity, and:

• Provide to customer liability ledgers.

• Check for compliance with customer trading limits.
• Check for compliance with customer settlement limits.

d. Test for compliance with other limits, as appropriate.

2. Identify those contracts for which incoming confirmations have not yet
been received as well as those for which incoming confirmations bear
unresolved discrepancies.

a. Unless bank personnel have taken follow-up action too recently to

expect response, prepare and mail confirmation forms to include:

• Counterparty name.

Foreign Exchange (Section 813) 32 Comptroller’s Handbook

 • Currency denominations and amounts.
• Rate.
• Transaction date.
• Maturity date.
• Settlement instructions, if applicable.

3. Using appropriate sampling techniques, select accounts from the trial

balance, and perform the following:

a. Prepare and mail confirmation forms to include the same information

cited in 2a.

b. After a reasonable time, mail second requests.

c. Follow-up on any no-replies or exceptions, and resolve differences.

Confirmation forms and return envelopes should be prepared:

• By bank staff under examiner supervision.

• On bank letterhead and signed by the auditor.
• Using the bank’s return address with conspicuous markings to
insure their direct routing to the responsible examiner.

4. In conjunction with the audit staff, intercept at the bank’s mail room all
incoming confirmations for a period of several days to determine:

a. If any contracts have been made but not booked.

b. Extent to which the confirmation clerk, or other personnel, relies

upon traders to resolve discrepancies.

Comptroller’s Handbook 33 Foreign Exchange (Section 813)