Foreign Exchange Market Participants

Market participants are categorized on the basis of their role and the nature of their dealings in the marketplace. These will influence their risk appetite, policies and controls in managing risk with each participant in the market.

Market participants should, in addition to clearly understanding their own role in the market, know the role in the marketplace of the other party to the transaction and ensure their expectations are aligned.

The following categories of counterparties are based on the ‘Guidelines of Transactions Involving Intermediaries’ produced by the New York Foreign Exchange Committee.

Counterparties

Any individual, corporation, partnership or trust, government or other entity that engages regularly in one or more types of transactions as principal with a dealer.

Counterparties can be sophisticated or unsophisticated end users. Their risk appetite can vary, ranging from high to very low. The reason they enter into financial transactions will usually be either to hedge underlying market risks or to speculate on future changes in the marketplace.

Dealers

With respect to any transaction, a person who presents themselves as being in the business of entering into similar transactions as principal with counterparties.

Dealers trade with counterparties to receive margin income. Dealers have a responsibility to ensure the counterparty understands the risks and that the transactions they are entering into are suitable for them.

Dealers trade with other dealers in order to lock in margin income from counterparty dealings, speculate on future changes in market prices, arbitrage discrepancies in the alignment of prices between related markets, or to hedge balance sheet exposures.

Discretionary Intermediaries

An intermediary who has the authority to bind a counterparty to a transaction with a dealer without transaction-specific approval by the counterparty.

Discretionary intermediaries must have prior approval from the counterparty to enter into the particular type of transaction for the purposes that it intended.

Discretionary intermediaries must establish that the counterparty has the authority and capacity to enter into the transaction and understands the risk.

The intermediary is responsible for advising the dealer as to the allocation of the transactions.

Discretionary intermediaries derive their income from the fees paid by the counterparty.

Non-discretionary Intermediaries

An intermediary who enters into transactions with a dealer on behalf of a counterparty only pursuant to transaction-specific approval by the counterparty.

Non-discretionary intermediaries must establish that the counterparty has the authority and capacity to enter into the transaction and understands the risks.

Non-discretionary intermediaries derive their income from the fees paid by the counterparty.

Broker

An intermediary who brings together market participants seeking to enter into particular types of transactions. Brokers generally bring together dealers with other dealers, intermediaries and counterparties.

In the foreign exchange markets regulators do not generally permit brokers to trade on the ‘house’ account – that is, where the broker is a counterparty to the transaction. In jurisdictions where regulators do permit house account trading these dealings must be at arms length from their broking activities.

Brokers derive their income from fee income arranging the transaction.  In the foreign exchange market the brokerage fee is generally paid by both parties to the transaction.