Sales representatives and traders use this when they show a client the final price and the trade is done. Back-office staff take the execution record and move on to the confirmation procedure.

The terms are fixed when both sides agree

A contract is formed when one party offers to enter into it by stating its terms and the other party accepts. Unless a law provides otherwise, no written form is needed1. So once the parties agree on the terms and price over the phone, the trade is done at that moment, and later market moves do not change the agreed terms. The examination manual of the Board of Governors of the Federal Reserve System (1998 edition; the "manual") described trades as being agreed in seconds, with the commitments made at that point treated as a binding contract2.

The agreed terms cannot easily be changed afterward either. With an FX forward, the rule is that the client uses up the contracted amount on the set delivery date or within the set period, and changing the date while keeping the contracted rate is generally not allowed3.

In an OTC derivative trade, the parties exchange a trade confirmation after the trade. The confirmation puts the agreed terms in writing so that each side can check its records against the other's and catch errors. It does not bring the trade into effect4. What a confirmation contains and how it is sent are covered in Trade Confirmations.

Before execution come understanding the client's needs, KYC and credit review, proposal and explanation, and the suitability check, and the explanation of the trade is finished by then too. Under the supervisory guidelines for major banks, a bank is to obtain from the client a written acknowledgment that the client received the explanation of the risks of the derivatives trade and of mid-term cancellation (the client's early termination), and to keep it on record5. The documents given with the explanation are the product explanation and the pre-contract document. The steps of the explanation are covered in Proposals and Explanations.

From quoting a price to confirming intent

Consider a fictional example of Company N, a corporate client that expects to receive USD 1 million in export proceeds from a US buyer in one year. To lock in now the yen amount it will receive, Company N enters into an FX forward with a financial institution to sell USD 1 million in one year. Company N's trade is an FX trade, so some of the steps follow the FX Global Code (the Code). The Code is a set of principles for participants in the foreign exchange market, and it is not law6.

  1. Company N's treasurer tells the financial institution's sales representative the direction (selling dollars), the amount (USD 1 million), and the delivery date (in one year), and asks for a price.
  2. The sales representative gets a price from a trader inside the firm7. The trader sets the price based on the market at that moment and the firm's own position2.
  3. The financial institution checks whether the trade fits within Company N's credit limit. Entering into an FX forward means extending credit to the client, so the financial institution reviews the client in advance8 and accepts the trade only when it fits within the approved limit (Code)9.
  4. The sales representative makes clear whether the price is firm (tradable) or an indicative quote (Code)10. Here, the sales representative shows a firm price of 140.00 yen per dollar.
  5. Company N answers, "We will sell USD 1 million at 140.00 yen," and the trade is done when the financial institution accepts.
  6. The trader records the date, time, and terms of execution and hands the trade over to the operations teams.

Figure 1 lays out these steps by team.

SalesTraderBack officeHears direction,amount, datePrice settingCredit limitcheckPrice shownto clientClient answer;trade is doneRecord of timeand termsTakes recordfor theconfirmation
Figure 1Flow by team, from showing a price to handing the trade over to operations
Figure description

The sales representative hears the direction, amount, and date from the client, and the trader sets the price from the market and the firm's position. Before the price is shown, the trade is checked against the credit limit. The sales representative shows the client a firm price, and the trade is done when the client answers; the trader then records the time and terms, and the back office moves on to the confirmation procedure. The check before execution takes place within the front office, and the back office takes over from the record.

As a result of the execution, it is fixed that in one year Company N will deliver USD 1 million and receive 140 million yen. If Company N holds off on answering and asks for a price again a little later, market moves in the meantime change the price shown. At 139.50 yen, the proceeds would be 139.5 million yen, 500,000 yen less. At 140.50 yen, they would be 140.5 million yen, 500,000 yen more. Which price was agreed at what time is checked later from the records kept at execution.

The price shown may include a fee or margin added by the financial institution (a markup), and the same trade may be priced differently for different clients. For FX trades, the Code asks firms to make both of these points clear to clients11.

Records kept at execution

At execution, the firm keeps records that let it check later when it agreed to what, and at what price. For FX trades, the Code sets out how records are kept. Both the time the request was received and the time of execution are recorded with sufficiently precise timestamps12. The records include items like these.

Item recorded Company N's example
Date and time the request was received and date and time of execution The time the price was requested and the time Company N answered
Type of product FX forward
Amount and price USD 1 million at 140.00 yen per dollar
Names of the staff member and the client The trader and Company N

With the time of execution on record, the trade price can be compared with the market at that time. This makes it easier to find trades done at prices away from the market, and the records also help resolve price differences and disputes with counterparties and clients1312.

Conversations are kept on record too. Sales and trading staff should preferably use communication channels that can be recorded and taped, especially the channels used for trading14. In the manual, taped conversations supplemented the process of sending and checking confirmations, and relying only on phone verification was treated as poor practice15.

The desk that executes and the teams that take over

The front office that deals with clients executes the trade, and the back office handles confirmations and settlement. For FX trades, a principle of the Code separates the staff who execute trades from the staff who handle confirmations17. The roles of each team are as follows.

Team Role in execution
Front-office sales representative Takes the terms from the client, shows the price received from the trader, and takes the client's answer
Front-office trader Sets the price based on the market and the firm's own position, and records the terms of execution
Credit team Sets each client's credit limit independently of the front office
Back office Receives the execution record, checks its contents, sends the confirmation, and checks it against the counterparty's reply

In the table, the roles of the sales representative, the trader, and the back office follow the manual (the back office's role includes the 2003 edition), and the role of the credit team follows a principle of the Code72189.

In the manual, who entered trade data into the firm's systems depended on how those systems were built. Where the front and back offices had separate systems, the back office received the trade ticket written by the trader and entered it. Where one system handled the whole process from execution to settlement, the front office entered the data, and the back office checked it before accepting it19.

Common problems at execution and how to prevent them

In an example given in the Code for FX trades, a client's treasurer completes 10 trades with one counterparty over the phone and then puts off entering them into the system until after lunch. A time gap like this between execution and recording can delay the exchange of confirmations20.

Communicating through channels that leave no record is also a problem. One poor-practice example in the Code is a sales representative who leaves early while a confirmation of an executed trade is still outstanding. The representative then sends the confirmation to the client by message from a personal mobile phone that is not recorded. In the good-practice example, the sales representative asks a colleague who is staying in the office to send the confirmation through a recorded channel21.

For FX trades, following the principles of the Code, the financial institution also guards against staff trading beyond their authorized scope. It sets the products each trader may trade and catches trades outside that scope in post-trade review22. The process for amending or canceling the terms of a trade after execution is also tightly controlled, with the sales, trading, and operations roles kept separate23.

On record keeping, the books and documents that a securities firm (a Type I financial instruments business operator) must prepare are set out in a Cabinet Office Order under the Financial Instruments and Exchange Act, and they include order slips24.

Participants that want to show their intention to follow the Code use a document called the Statement of Commitment. Using the Statement of Commitment is voluntary, just as the Code itself is25.

Notes

  1. "民法" (Civil Code, in Japanese), Article 522, paragraph 1 (formation of a contract) and paragraph 2 (no written or other formality required). An official English translation is available as "Civil Code" in Japanese Law Translation, https://www.japaneselawtranslation.go.jp/en/laws/view/3494/en. ↩

  2. Board of Governors of the Federal Reserve System, "Trading and Capital-Markets Activities Manual" (the manual), Section 2050.1 (February 1998), "TRADE CONSUMMATION," page 2. ↩ ↩2 ↩3

  3. Japan External Trade Organization (JETRO), "先物為替予約の種類と利用にあたっての留意点：日本" (in Japanese), "予約の取消と期日変更" (Cancellation of contracts and changes of date) under "II. 先物為替予約の留意点" (II. Points to note about forward exchange contracts). ↩

  4. The manual, Section 2060.1 "Operations and Systems Risk (Back-Office Operations)" (February 1998), "Confirmations," page 3. ↩

  5. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-3-3-1-2(2)①イ, items a to d (pages 217–219) (in Japanese). The guidelines call this written record a "confirmation document, etc." (our translation). It is a written acknowledgment that the client received the explanation, and it is a different document from a trade confirmation. ↩

  6. Global Foreign Exchange Committee, "グローバル外為行動規範" (FX Global Code, December 2024 version, provisional Japanese translation by the Tokyo Foreign Exchange Market Committee; the "Code"), "I. グローバル外為行動規範とは" (I. What the FX Global Code is) in the foreword (page 1) (in Japanese). The English original is Global Foreign Exchange Committee, "FX Global Code" (December 2024), https://www.globalfxc.org/uploads/fx_global.pdf; the principle numbers are the same, and the page numbers are those of the translation. ↩

  7. The manual, Section 2050.1 (February 1998), page 1 (the paragraph on the "sales force or marketing staff"). ↩ ↩2

  8. Japan External Trade Organization (JETRO), "先物為替予約の種類と利用にあたっての留意点：日本" (Types of forward exchange contracts and points to note in using them: Japan, in Japanese), "事前審査" (Prior review) under "II. 先物為替予約の留意点" (II. Points to note about forward exchange contracts). ↩

  9. The Code, Principle 29 (page 36) (in Japanese). ↩ ↩2

  10. The Code, "役割" (Role) under Principle 9 (page 13) (in Japanese). ↩

  11. The Code, Principle 14 (page 21) (in Japanese). ↩

  12. The Code, Principle 36 (page 41) (in Japanese). ↩ ↩2

  13. The manual, Section 2050.1 (February 1998), page 2 (the paragraph on "Time-stamping of trade tickets"). ↩

  14. The Code, Principle 23 (page 30) (in Japanese). ↩

  15. The manual, Section 2060.1 (February 1998), "Confirmations," pages 3–4. ↩

  16. The Code, Principle 44 (page 46) (in Japanese). ↩

  17. The Code, Principle 46 (page 46) (in Japanese). ↩

  18. The manual, Section 2060.1 (page 2 of the April 2003 version and page 3 of the February 1998 version), the paragraphs on the steps after the trade ticket is received. ↩

  19. The manual, Section 2050.1 (February 1998), "Transaction Flow," page 2. ↩

  20. The Code, the example for Principle 47 in Annex 1 (page 76) (in Japanese). ↩

  21. The Code, the examples for Principle 23 in Annex 1 (pages 71–72) (in Japanese). ↩

  22. The Code, Principle 38 (page 42) (in Japanese). ↩

  23. The Code, Principle 45 (page 46) (in Japanese). ↩

  24. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 157, paragraph 1, item 3. ↩

  25. The Code, Annex 3 "遵守意思表明" (Statement of Commitment) (pages 81–82) (in Japanese). ↩