T H E F O R E I G N E X C H A N G E C O M M I T T E E T U R N S F R E Q U E N T L Y T O I T Sassociate organization, the Financial Markets Lawyers Group (FMLG), for legaladvice and support. The FMLG, sponsored by the Federal Reserve Bank ofNew York, consists of in-house attorneys active in the foreign exchange mar-ket. Members represent various financial institutions, including commercialand investment banks. A senior member of the Federal Reserve Bank ofNew York’s legal staff chairs the group.

The FMLG supports the Committee by

● reviewing its new documentation and publications prior to circulation,

● briefing the membership on pressing legal issues,

● advising on Committee actions, including lobbying efforts, and

● emphasizing the need for consistent industry documentation related to foreignexchange transactions and collaborating with other industry groups on docu-mentation issues.

F M L G A C T I V I T I E S I N 2 0 0 0In 2000, the FMLG worked on a wide variety of initiatives with a number ofindustry groups. Many of the projects were directly related to the ForeignExchange Committee’s work, reflecting the close relationship between thesetwo bodies. Additional projects involved collaboration with other organizationsand focused on assisting the broader financial markets. Some of this work isreviewed below.

M o n i t o r i n g t h e P r o g r e s s o f t h e C o m m o d i t y E x c h a n g e A c t ’ s M o d e r n i z a t i o nThroughout 2000, the Committee and the FMLG were attuned to the urgencyof reforming the Commodity Exchange Act (CEA). Reform of the CEA would

a) provide more legal certainty for many products,

b) promote the productive growth of derivative securities, and

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c) mitigate obstacles to financialmarket innovation that mayhave occurred under thepresent CEA.

In consultation with the FMLG,the Committee often joined otherindustry groups in lobbying forthese initiatives. Efforts includedsending letters to the CommodityFutures Trading Commission (seepage 93), to House Banking andFinancial Services CommitteeChairman James Leach (page 95),and to Speaker of the House J.Dennis Hastert and HouseMinority Leader Richard Gephardt(page 97).

Passage of the CommodityFutures Modernization Act in late2000 achieved many of the goalsidentified by the Committee andthe FMLG.

C r o s s - P r o d u c t M a s t e rA g r e e m e n t

The FMLG collaborated with theBond Market Association (BMA)in drafting and publishing theCross-Product Master Agreement.This agreement, which incorporatesexisting product-focused masteragreements, acts as a contractualsuperstructure that will encompassother bilateral master agreements.In February 2000, the FederalReserve Bank of New York, theFMLG, and the BMA sponsored aconference to introduce this docu-ment and outline its benefits tothe general financial community.

C o l l a t e r a l A n n e xThe Collateral Annex providesexamples of contractual terms forone-way collateralization of for-

eign exchange or currency optiontransactions governed by theCommittee’s various masteragreements. Use of the documentis strongly encouraged as a wayto improve risk management. It isreprinted on pages 31-45 of thisreport and can be found on theFMLG’s web site, <www.newyorkfed.org/fmlg>. In addition, a user’sguide to the Collateral Annex isavailable on the same web site.

W o r k i n g w i t h E M TAThe FMLG continued to workclosely in 2000 with the EmergingMarkets Traders Association(EMTA). In recent years, EMTA hasmade considerable efforts to clarifythe documentation for the nonde-liverable forwards (NDFs) market,a difficult task given the diversityof this fragmented market. TheCommittee and the FMLG havewarmly endorsed EMTA’s efforts.Working groups formed by EMTAthat include members of theFMLG, traders, and other legal andoperational staffs have agreed ontemplates for several specific NDFcurrencies, thus making consider-able strides in standardizing trad-ing documents and terms.

In addition, in the interest ofimproving the efficiency of foreignexchange trading, particularly foremerging market currencies, theCommittee and the InternationalSwaps and Derivatives Association(ISDA) have provided on-lineaccess to an updated version ofAnnex A of the 1998 FX andCurrency Options Definitions.Annex A gives traders in emergingmarket currencies a list of the

accepted trading sources andspecifications associated witheach currency.

B a r r i e r O p t i o n sMembers of an FMLG subgrouphave agreed on standard confir-mations for two widely used barrieroptions instruments: the Europeanknock-out/knock-in and the one-touch binary barrier options. Thesesample templates are reprinted onpages 59 to 67. Institutions areurged to consider using theseformats to improve clarity in thismarket. In 2001, the FMLG sub-group will turn its attention to thedevelopment of standard termi-nology for the evolving barrieroptions market.

P r e p a r i n g f o r C L SThe development of the CLS(Continuous Linked Settlement)Bank is an important event in theforeign exchange market. Recog-nizing this importance, the FMLGformed a subcommittee to studyissues related to the CLS Bank andplans to monitor closely its impacton the market and on publishedindustry documentation.

O t h e r I n i t i a t i v e sa) Following Poland’s legislative

action requiring Polish-languagedocumentation for certainPolish-related transactions, theFMLG, in coordination withother industry groups, produceda Polish translation of theInternational Foreign ExchangeMaster Agreement (IFEMA)documents.

10 FOREIGN EXCHANGE COMMITTEE 2000 ANNUAL REPORT

b) The FMLG addressed specificissues raised by Greece’s entryinto the European Economicand Monetary Union (EMU) byamending the Protocol docu-ment, first published by theFMLG in October 1998. TheEMU Protocol offers suggestedlanguage for the IFEMA set ofmaster agreements that couldbe adopted, if needed, on abilateral basis between twocounterparties.

c) The FMLG played an importantrole in promoting and organiz-ing an international conferenceon the importance of netting.

Held in Mexico City onNovember 9 and 10, the con-ference was sponsored by theFederal Reserve Bank ofNew York, the Center for LatinAmerican Monetary Studies,and the World Bank.

The purpose of the gather-ing, which attracted more thanninety individuals from seven-teen countries, was to informpolicymakers and legislators inLatin American and Caribbeancountries about the benefits ofnetting and the need to adoptnetting laws that would providecertainty to foreign exchange

transactions. FMLG membersprovided contact names for theinvitation list and participatedin presentations.

Throughout the year, theFMLG also strengthened itsties with the EuropeanFinancial Markets LawyersGroup, a legal industry associa-tion affiliated with theEuropean Central Bank.

d) The FMLG continued to provideits membership with up-to-date netting opinions for itspublished documentation inkey jurisdictions.

Legal Initiatives 11