The Principles and Practices for Wholesale Financial Market Transactions
1. Purpose of Principles and Practices:
2. Participants - Financial Resources:
3. Participants - Policies and Procedures:
- 3.1 Policies and Procedures
- 3.2 Supervision and Training of Employees
- 3.3 Control and Compliance
- 3.4 Risk Management
- 3.5 Independent Risk Monitoring
- 3.6 Valuation
- 3.7 Credit Risk
- 3.8 Legal Capacity and Authority to Transact
4. Relationships Between Participants:
- 4.1 Fair Dealing and Professional Standards
- 4.2 Relationships with Counterparties
- 4.3 Confidentiality
5. Considerations Relating To Relationships Between Participants:
- 5.1 Introduction
- 5.2 Counterparty Decision-Making Capability
- 5.3 Notifying Counterparties of Nature of Relationship
- 5.4 Providing Additional Information to Counterparties
6. Mechanics of Transactions:
- 6.1 When Transactions are Binding
- 6.2 Confirmations
- 6.3 Payment and Settlement Instructions
- 6.4 Documentation
- 6.5 Complaints and Settlement of Differences
7. Standards for Transactions:
- 7.1 Misuse of Market Terminology and Conventions
- 7.2 Manipulative Practices
- 7.3 Bribes and Outside Fees and Commissions
- 7.4 Rumors and False Information
- 7.5 Money Laundering and Other Criminal Activities
August 17, 1995
It is with pleasure that we provide the enclosed final version of the Principles and Practices for Wholesale Financial Market Transactions (the "Principles"). The Principles were developed over the course of the past year by a drafting committee consisting of representatives from several financial trade associations, under the coordination of the Federal Reserve Bank of New York. Representatives of the Emerging Markets Traders Association, the Foreign Exchange Committee of the Federal Reserve Bank of New York, the International Swaps and Derivatives Association, the New York Clearing House Association, the Public Securities Association and the Securities Industry Association participated in the preparation of the Principles.
The drafting process entailed an approximately six-week public comment period, during which the March 20, 1995 draft of the Principles was widely circulated. During the comment period, the drafting committee received comment letters from 22 institutions, law firms, trade associations, bar associations and government agencies regarding the draft Principles. The drafting committee also held an open meeting at the Federal Reserve Bank of New York to discuss this draft of the Principles with interested parties.
In preparing the final version of the Principles, the drafting committee considered carefully all the comments made in each of the comment letters. Members of the drafting committee also met personally with representatives from many of the commenting institutions. In many cases, changes to the draft Principles were adopted to respond directly to suggestions made by the commenters. The purpose of this letter is to highlight the most significant points raised in the comment letters and these meetings, and to indicate where responsive changes to the draft Principles were made.
Several commenters noted that the definition of Participant in Section 1.1 of the draft Principles may have been unnecessarily confusing or over-inclusive due to the long list of legal terms that were referenced. The drafting committee agreed that the list was unnecessary, and it has been removed from the final version of the Principles.
The drafting committee believed that a technical definition of Participant was not consistent with the voluntary nature of the Principles. Any participant in wholesale financial markets transactions can, if they choose, adhere to the Principles. Therefore, a sufficient definition of Participant is "any corporation, partnership, trust, government or other entity that engages regularly in one or more types of Transactions". The word "regularly" was added to address the concerns of certain commenters who feared that every institution that entered into only a few Transactions would be assumed to be a Participant. Thus the definition has been limited to those institutions that regularly enter into Transactions. Of course, even institutions that do not regularly enter into Transactions may find value in reviewing and implementing where appropriate portions of the Principles.
A few commenters suggested that the definition of Participant should be limited to dealers, so that end-users that participated in the wholesale financial markets could not fall within the Principles. This suggestion was based on the notion that certain assumptions contained in the Principles (i.e., the assumption of arm's-length relationships) should not apply to such end-users. Rejecting for end-user Participants the provisions of the Principles that confirm the arm's-length nature of Transactions might, however, promote an alternate governing assumption that end-user Participants may rely on communications of their counterparties as recommendations and investment advice in Transactions. The drafting committee concluded that such an assumption would be at odds with many of the provisions of the Principles that encourage parties to clearly communicate the nature of their relationship to each other, and to enter into written agreements where one Participant wishes to rely on another Participant for recommendations or investment advice. To preclude end-users from coming within the definition of Participant would be to encourage the types of uncertainty that the Principles are designed to reduce.
In the highly competitive wholesale financial markets, Participants are free to negotiate the nature of their relationships. However, especially in times of stress in financial markets, Participants should want to avoid ambiguities in their relationships with other Participants. If the nature of the relationship is clear, then the firms will be better and more quickly able to decide what action is appropriate in the circumstances. For this reason, prudence dictates that a decision should be made up front as to the nature of the relationship. If one Participant prefers not to have an arm's length relationship, it certainly will be able to enter into a written agreement with another Participant providing otherwise.
Although the drafting committee did not adopt the suggestion to exclude or otherwise segregate end-user Participants from the Principles, the drafting committee does recognize that some provisions of the Principles will be more applicable to dealer Participants than end-user Participants. Therefore, Section 5.1 of the Principles now notes that the provisions of Section 5 may be of particular relevance to dealers. Furthermore, Section 5.1 encourages Participants to adopt policies and procedures to identify and address the general kinds of circumstances described throughout Section 5, in order to protect the Participant from relationship, reputational or litigation risks.
- Reliance on Advice
Sections 1.2 and 4.2 of the Principles confirm the arm's-length nature of relationships between Participants in Transactions. Section 4.2.2 of the draft Principles stated that a Participant that wished to rely on its counterparty for recommendations should enter into a written agreement with the counterparty to that effect. Several commenters interpreted this provision broadly to disclaim responsibility even for the factual accuracy of statements made to a counterparty.
The drafting committee did not intend for Section 4.2.2 to be interpreted in this manner. The intent of this Section was merely to describe what Participants should do if they wished to enter into an advisory relationship where one Participant would provide recommendations or investment advice to the other. It was not intended to protect or condone inaccurate or intentionally misleading factual statements. Furthermore, the Principles do not and could not modify the common law rules of fraud. However, the drafting committee recognized the need for clarification on this point, and Section 4.2.2 has been appropriately redrafted, including inclusion of a statement that factual communications relating to Transactions should be accurate and not intentionally misleading.
Additionally, a few commenters noted that Section 4.2.2 of the draft Principles could be interpreted to undermine a Participant's potential obligations pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA") and regulations thereunder when entering into Transactions with pension plans that are Participants. These commenters explained that in certain situations, a Participant could become a fiduciary of a pension plan by providing investment advice or recommendations regarding securities or other property on a regular basis pursuant to a mutual agreement, arrangement or understanding, written or otherwise, if such advice served as the primary basis for investment decisions with respect to the assets of the pension plan. The determination as to whether such a relationship exists is based on the facts and circumstances of the relationship. Therefore, some commenters noted, a Participant could become a fiduciary to a pension plan Participant under ERISA even if the parties did not enter into a written advisory agreement.
As noted in Section 1.3 of the draft Principles, the Principles are not intended to replace any applicable statutes or regulations such as ERISA. Section 4.2.2 of the draft Principles also stated that any advisory obligations always were subject to any rules or regulations that placed affirmative obligations on a Participant. Nevertheless, some commenters thought that Section 4.2.2 should be deleted because it suggested a course of action (entering into a written agreement) that might not be necessary in certain limited circumstances to create a fiduciary relationship between Participants.
The drafting committee recognizes the concerns of these commenters and has redrafted Section 4.2.2 with these issues in mind. Notably, Section 4.2.2 now reiterates the notion that all Participants should enter into written advisory agreements to avoid misunderstandings and disputes that could arise by relying on "facts and circumstances" to govern the nature of a relationship. Revised Section 4.2.2 also acknowledges that certain laws, rules or regulations expressly provide that in some situations an oral agreement or the facts and circumstances of a relationship alone may give rise to an advisory or fiduciary relationship, in some cases even in the presence of a written agreement purporting to negate such a relationship. Finally, Section 1.3 was clarified to further express the view that the Principles do not replace or modify any applicable statutes, rules or regulations.
Despite these changes designed to address the concerns expressed by some commenters, the drafting committee continues to hold the view (shared by other commenters) that Participants should strive to clarify the nature of their relationships, and to reduce any advisory or fiduciary agreements to writing.
In order to promote the clarification of the arm's-length relationship of Transactions, Section 5.2 of the Principles now expresses the desirability of maintaining policies and procedures to identify and address situations where a counterparty has the capability to understand and make independent decisions regarding Transactions but where the counterparty appears to assume incorrectly that it may rely on the Participant for recommendations or investment advice.
Where a Participant does wish to rely on a counterparty's communications as recommendations or investment advice, the Principles state that the Participant should put its counterparty on notice in writing that it is relying and obtain the counterparty's agreement in writing to do business on that basis. The draft Principles also stated that the Participant should provide the counterparty with accurate and complete information regarding the size, nature and condition of the counterparty's business. Several commenters noted that a "completeness" standard was potentially overbroad. Section 4.2.2 of the Principles now refers only to information that is accurate and sufficient to allow the counterparty to provide recommendations or investment advice to the Participant.
Section 4.3 of the draft Principles stated that Participants should keep confidential all information relating to Transactions, except where disclosure was required or requested by a regulatory authority. Several commenters concluded that this Section was inconsistent with Section 3.6.2, which encouraged Participants to seek external valuations of Transactions from outside parties at appropriate intervals. These commenters correctly noted that to obtain such valuations would necessarily involve disclosures to a third party valuation agent that could be deemed to violate Section 4.3.
After additional consideration, the drafting committee concluded that Section 4.3 as proposed was overly broad and not reflective of current market practice. That is, the drafting committee recognized that the expectation of confidentiality attaches to the identity of counterparties involved in particular Transactions, and not with respect to all information related to such Transactions. Therefore, the revised Section 4.3 has been limited to information related to a counterparty's involvement in a Transaction. Because the counterparty's identity is not necessary to obtain a valuation, the conflict between Sections 4.3 and 3.6.2 is resolved by this change.
Finally, the drafting committee also recognized that in some specific situations (e.g., where there is a proprietary deal structure) a Participant may desire to have all information relating to a Transaction kept confidential. However, the drafting committee believed that such situations should be dealt with on a case-by-case basis between the parties, and not through the broad confidentiality provision contained in the draft Principles.
Some commenters noted that Section 3.6 of the draft Principles (related to valuation) did not affirmatively state that Participants were not obligated to provide valuations of Transactions to counterparties. This omission is remedied by the new language in Section 3.6.4. That Section was modified further to require any Participant providing a valuation to clearly state the characteristics of such valuation. This provision is consistent with Section 3.6.2, which requires any Participant requesting a valuation to clearly state the desired characteristics of that requested valuation.
Section 3.6.2 also was modified to affirmatively encourage all Participants to ascertain the availability of external valuations (which may include valuations from its counterparty) prior to entering into a Transaction, if the Participant does not have the internal capability to value a Transaction at appropriate intervals.
- Distribution of Principles
Some commenters believed that Participants who adhere to the Principles should publicize or otherwise notify counterparties of their adherence. Such notification would be consistent with the goal of informing counterparties of the nature of relationships between Participants. Section 5.3 has been amended to suggest that sending a copy of the Principles may be one way for a Participant to put its counterparty on notice regarding the relationship between Participants.
Section 5.4 of the draft Principles related to voluntarily providing additional information to a counterparty to assist the counterparty in its decision-making process. Many commenters recognized that such voluntary additional information may be especially important in the context of a Transaction in which the payment formula is particularly complex or which includes a significant leverage component. Section 5.4 has been redrafted to reflect these comments.
Based on a suggestion from a commenter, Section 6.5 of the draft Principles has been revised to encourage Participants to notify its counterparty of any disputes or complaints related to Transactions with that counterparty.
A few commenters suggested that the draft Principles were fundamentally flawed because they did not create a new obligation on Participants to determine the suitability of Transactions for their counterparties. The drafting committee regards these comments as expressing a view of how Transactions should be conducted that is fundamentally inconsistent with the view reflected in the Principles. An obligation to determine suitability of Transactions for a counterparty (in the absence of an applicable statute, rule or regulation or a written agreement to that effect) would create duties and responsibilities that are unavoidably vague in scope and conflict with the arm's-length nature of Transactions.
This alternative approach is incompatible with the central concept of the Principles, supported by most commenters, that encourage Participants to take responsibility for their own decisions regarding Transactions. Furthermore, the alternative approach would undermine the finality of agreed Transactions, and create tremendous uncertainty regarding the economic risk position of Participants. Therefore, the drafting committee believes that a suitability obligation can not and should not be imposed on Participants. Instead, the Principles encourage each Participant to seek independent advice or enter into a written advisory agreement whenever it is unable or unwilling to take responsibility for its own decisions relating to Transactions.
This letter has summarized the most significant comments received verbally and in writing during the comment period, and the major changes reflected in the final version of the Principles based on these comments.
On behalf of the entire drafting committee, we would like to thank all those who took the time to provide the drafting committee with comments and input. This participation led to important changes, which should help to further the goal of establishing the Principles as guidance for all entities that regularly engage in wholesale financial market transactions.
Gay H. Evans
Co-Chair of Principles
International Swaps and Derivatives Association, Inc.
Lewis W. Teel
Co-Chair of Principles
Foreign Exchange Committee
Ernest T. Patrikis
First Vice President
Federal Reserve Bank of New York
These Principles and Practices for Wholesale Financial Market Transactions are the result of a joint effort by several groups that represent participants in the over-the-counter financial markets. These Principles were prepared in order to confirm the relationship between Participants and to articulate a set of best practices with respect to over-the-counter financial markets transactions between Participants.
Representatives of the Emerging Markets Traders Association, the Foreign Exchange Committee of the Federal Reserve Bank of New York, the International Swaps and Derivatives Association, the New York Clearing House Association, the Public Securities Association and the Securities Industry Association participated in the preparation of the Principles. The preparation of the Principles was coordinated by the Federal Reserve Bank of New York.
1. Purpose of Principles and Practices
These Principles and Practices for Wholesale Financial Market Transactions (the "Principles") are intended to provide guidance for the conduct of wholesale transactions in the over-the-counter financial markets between Participants ("Transactions").
"Participant" means any corporation, partnership, trust, government or other entity that engages regularly in one or more types of Transactions. The term "counterparty" as used in the Principles means a Participant that is the other party to a Transaction with a Participant.
The Principles reflect principles and practices in the United States of America and may not reflect principles and practices in other countries.
1.2 Nature of Principles
The Principles confirm the arm's-length nature of Transactions and describe the assumptions that Participants may make about each other. The Principles also articulate a set of best practices that Participants should aspire to achieve in connection with their Transactions. It is intended that the Principles (especially those contained in Section 3) will continue to evolve over time as business practices change. The Principles do not create any legally enforceable obligations, duties, rights or liabilities.
Adherence to the Principles is strictly voluntary. A Participant may implement the Principles as it deems appropriate. Any policies or procedures implemented or other actions taken by a Participant based on the Principles should be appropriate for the size, nature and complexity of the Participant and its Transactions as well as its business activities generally.
It should not be assumed that an entity that is within the definition of Participant necessarily adheres to the Principles. Nevertheless, because the Principles confirm the nature of the relationship between Participants, an entity that is within the definition of Participant should be aware that Participants will make certain assumptions when entering into Transactions with that entity.
1.3 Supplementary Nature of Principles
The Principles are intended to supplement, and are not intended to replace or modify, applicable statutes, governmental regulations, exchange, board of trade or self-regulatory organization rules and industry practices (including those embodied in applicable codes of conduct).
2. Participants - Financial Resources
2.1 Financial Resources
A Participant should maintain adequate financial resources, including capital, liquidity or other sources of support, to manage the material risks associated with its Transactions and meet its Transaction commitments.
3. Participants - Policies and Procedures
3.1 Policies and Procedures
With respect to policies and procedures of the types identified in the Principles, a Participant should have policies approved by its board of directors, a committee thereof or an appropriate level of senior management. An appropriate level of senior management should approve controls and procedures to implement these policies. All policies, controls and procedures should be appropriate to the size, nature and complexity of the Participant and its Transactions, and should be reviewed as business and market circumstances change.
3.2 Supervision and Training of Employees
A Participant should maintain internal policies and procedures for supervising and training appropriate officers, employees and representatives of the Participant with respect to conduct related to Transactions.
3.3 Control and Compliance
A Participant should maintain and enforce internal control and compliance procedures designed so that its Transactions are conducted in accordance with applicable legal and regulatory requirements, internal policies and any specific requirements contained in any agreements applicable to its Transactions.
3.4 Risk Management
A Participant should maintain (i) policies and procedures that clearly delineate lines of responsibility for managing market, credit and other risks, (ii) adequate systems for measuring risks, including, where appropriate, systems for developing stress scenarios to measure the impact of market conditions that might reduce liquidity or cause extraordinary changes in price or volatility, (iii) appropriately structured limits on risk taking, (iv) policies and procedures designed for comprehensive and timely risk reporting, and (v) policies and procedures for reviewing the adequacy of internal measures of credit risk, market risk and valuation.
3.5 Independent Risk Monitoring
A Participant should have knowledgeable individuals responsible for risk monitoring and control who are independent of the individuals that conduct the Transactions that create the risk exposure.
3.6.1 Valuation of Transactions
A Participant should maintain policies and procedures for the valuation of Transactions at intervals appropriate for the type of Transaction in question, regardless of the accounting methodology employed by the Participant. These policies and procedures should address the specific methodology used for valuation, including as appropriate the use of market or model based valuations with reserves and adjustments.
3.6.2 Obtaining External Valuations
If a Participant does not have the internal capability to value a Transaction and a price or market valuation of a Transaction is not publicly available or otherwise readily ascertainable, then the Participant should (i) ascertain the availability of external valuations (which may include valuations from its counterparty) prior to entering into the Transaction and (ii) obtain an external valuation of the Transaction at intervals appropriate for the type of Transaction in question. When a Participant requests an external valuation for a Transaction, the Participant should clearly state the desired characteristics of the requested valuation (e.g., mid-market, indicative or firm price).
3.6.3 Evaluating External Valuations
In assessing any external valuation received, it is essential that the Participant consider the circumstances in which the valuation was provided, including criteria such as whether the party providing the valuation is a counterparty to the Transaction, the time frame within which the valuation was provided and whether the party supplying the valuation was compensated for its services. Participants should understand that a valuation of a particular Transaction may include adjustments for, among other factors, credit spreads, cost of carry and use of capital and profit, and may not be representative of either (i) the valuation used by a counterparty for internal purposes or (ii) other market or model based valuations.
3.6.4 Providing Valuations to Other Participants
Entering into a Transaction does not obligate a Participant to provide valuations of that Transaction to its counterparty. However, if a Participant does provide valuations of Transactions, it should maintain policies and procedures concerning the provision of valuations. Such policies and procedures should require the Participant to clearly state the characteristics of any valuation provided (e.g., mid-market, indicative or firm price). In those markets with specific conventions regarding valuations, Participants should supply valuations using those conventions, unless otherwise agreed.
3.7 Credit Risk
Before entering into a Transaction involving credit exposure to a counterparty, a Participant should assess its counterparty's ability to meet its payment obligations. As credit relationships depend upon the existence of a legal relationship between parties, Participants should recognize situations where special steps may be necessary to assure that Transactions are enforceable against the party on whose credit the Participant is relying, particularly when dealing through third parties such as agents, brokers or investment advisors acting for undisclosed principals.
3.8 Legal Capacity and Authority to Transact
Before entering into a Transaction, a Participant should take measures reasonable under the circumstances to satisfy itself that its counterparty has the legal capacity and authority to enter into the Transaction. A Participant should recognize that Transactions with governmental units and regulated counterparties (such as depository institutions, mutual funds, pension plans, trusts and insurance companies) may require additional scrutiny to establish the scope of the counterparty's legal capacity and authority. Special scrutiny also should be given to the scope of a third party agent's authority to act for its principal.
4. Relationships Between Participants
4.1 Fair Dealing and Professional Standards
A Participant should act honestly and in good faith when marketing, entering into, executing and administering Transactions. A Participant should act in a manner designed to promote public confidence in the wholesale financial markets. In addition, a Participant should show its counterparties professional courtesy and consideration.
4.2 Relationships with Counterparties
4.2.1 Decision-Making Capability
A Participant should satisfy itself that it has the capability (internally or through independent professional advice) to understand and make independent decisions about its Transactions. That capability includes the experience, knowledge and ability to analyze the tax and accounting treatment as well as the legal, credit, market and liquidity risks of each Transaction. Absent a written agreement to the contrary, a Participant should expect that its counterparty will assume that the Participant has the capability to understand and make independent decisions about its Transactions and will act accordingly.
4.2.2 Reliance on Investment Advice
The character and level of risk that is desirable for a particular Participant is a business judgment that is appropriately made by the Participant's governing body or management, in accordance with any applicable statutory or regulatory constraints, based on an evaluation of the totality of its particular circumstances and objectives.
A Participant may communicate to its counterparty economic or market information relating to Transactions and trade or hedging ideas or suggestions. All such communications (whether written or oral) should be accurate and not intentionally misleading. Absent a written agreement or an applicable law, rule or regulation that expressly imposes affirmative obligations to the contrary, a counterparty receiving such communications should assume that the Participant is acting at arm's length for its own account and that such communications are not recommendations or investment advice on which the counterparty may rely.
In any case where a Participant does not wish to make independent investment decisions regarding a Transaction and instead wishes to rely on a counterparty's communications as recommendations or investment advice, the Participant should, prior to entering into a Transaction with that counterparty involving such reliance, (i) put its counterparty on notice in writing that it is relying on the counterparty, (ii) obtain the counterparty's agreement in writing to do business on that basis, and (iii) provide the counterparty with accurate information regarding its financial objectives and the size, nature and condition of its business sufficient to provide such recommendations or investment advice. The extent of the counterparty's obligations to provide recommendations and investment advice then will be determined by that written agreement and any applicable law, rule or regulation that imposes affirmative obligations on the counterparty. Certain laws, rules or regulations expressly provide that, in some situations, an oral agreement or the facts and circumstances of a relationship alone may give rise to an advisory or fiduciary relationship, in some cases even in the presence of a written agreement purporting to negate such a relationship. Nonetheless, to avoid misunderstandings and disputes, the steps outlined above should be followed.
4.2.3 Transaction Information
A Participant should ensure that it identifies and reaches agreement on all material terms and conditions of each Transaction it enters into. In some cases it may be useful for the parties to exchange a written outline of the principal terms and conditions of a Transaction prior to its execution. A Participant should either ask questions and request additional information or seek independent professional advice when it does not have a full understanding of either the risks involved in a Transaction or the fit between a Transaction and its desired risk profile. A counterparty should answer such questions and respond to such requests for additional information in good faith, and the information provided should be accurate and not intentionally misleading. A Participant should expect that, if it does not expressly ask questions or request additional information with respect to a Transaction, its counterparty will assume that the Participant understands the Transaction and has all the information it needs for its decision-making process.
4.2.4 Other Activities of Counterparties
A Participant should be aware that in the over-the-counter financial markets it may be customary for a counterparty to (i) take positions in instruments that are identical or economically related to a Transaction that has been or will be entered into with the Participant, or (ii) have commercial relationships with the issuer of an instrument underlying a Transaction that has been or will be entered into with the Participant.
4.2.5 Role as Agent or Broker
A Participant that represents itself as generally acting as a "broker" in Transactions should act only as agent for both parties or (in those markets where it is customary to do so) as riskless principal, unless it discloses clearly to all parties before executing a Transaction that it is acting in another capacity.
A Participant that represents itself as generally acting as a principal may on occasion agree to act as an agent for a counterparty, to assist the counterparty to execute a Transaction with other Participants on a "best execution" basis or at a specified level, or to effect a Transaction directly if and when the Participant is prepared to do so at a specified level. A Participant acting as an agent should avoid misusing its knowledge of the terms on which the counterparty is prepared to execute a Transaction to take unfair advantage of the counterparty.
A Participant should be aware that its agent may be engaging in other activities as described above in Section 4.2.4.
A Participant expects that its involvement in a Transaction will be handled in confidence by its counterparty. Accordingly, a Participant should not, except with express permission, disclose or discuss, or request that others disclose or discuss, information relating to its counterparty's involvement in a Transaction except to the extent required by law or required or requested by a regulatory authority.
5. Considerations Relating to Relationships Between Participants
A Participant (particularly one that is holding itself out as a dealer in a particular wholesale financial instrument) should maintain policies and procedures that identify and address circumstances that can lead to uncertainties, misunderstandings or disputes with the potential for relationship, reputational or litigation risk. A Participant should consider including in such policies and procedures provisions designed to address the particular circumstances described in this Section 5. Maintaining and complying with such policies and procedures should be regarded as steps taken by the Participant for its own protection. Accordingly, neither the maintenance nor compliance with such policies and procedures should be construed as giving rise to duties to others.
5.2 Counterparty Decision-Making Capability
A Participant may wish to evaluate (based upon information in its possession) its counterparty's capability (internally or through independent professional advice) to understand and make independent decisions about the terms and conditions of its Transactions. A Participant may, without limitation, consider the following factors in evaluating a counterparty's capability: the nature of the counterparty's business; the financial size and condition of the counterparty; the counterparty's prior dealings or experience in Transactions; and the nature, complexity and risks of a proposed Transaction. A Participant should be aware that if it holds itself out as a dealer for a certain type of Transaction, other Participants will assume that it has the capability to understand and make independent decisions regarding that type of Transaction.
A Participant may wish to maintain policies and procedures for identifying (based on information in the possession of the representative of the Participant executing the Transaction on the Participant's behalf) and addressing exceptional situations (which may pose relationship, reputational or litigation risks to the Participant) where its counterparty either (i) does not have the capability (internally or through independent professional advice) to understand and make independent decisions regarding a particular Transaction or a type of Transaction being proposed by the Participant or (ii) has the capability to understand and make independent decisions regarding a Transaction, but where (a) the amount of risk to the counterparty involved in the Transaction appears to be clearly disproportionate in relation to the size, nature and condition of the counterparty's business or (b) the counterparty appears to assume incorrectly that it may rely on the Participant for recommendations or investment advice.
A Participant may wish to consider taking such steps, if any, as it may deem appropriate in the circumstances to address these types of exceptional situations, including, without limitation, (i) providing or obtaining additional information to or from the counterparty, (ii) involving additional qualified personnel internally, (iii) involving additional qualified personnel of the counterparty, (iv) entering into a written agreement specifying the nature of the relationship or (v) not entering into the particular Transaction or type of Transaction with that counterparty. This list of steps to consider for exceptional situations is neither exhaustive nor mandatory because any appropriate response will be based upon the facts and circumstances of a specific situation.
5.3 Notifying Counterparties of Nature of Relationship
A Participant may wish to inform some or all of its counterparties of the nature of the relationships between Participants. Such information may, without limitation, take the form of (i) communications to a counterparty that are designed to put the counterparty on notice about the Participant's assumptions regarding the counterparty's capability to understand and make independent decisions and non-reliance concerning Transactions with the Participant (which communications may include sending a copy of the Principles to the counterparty), or (ii) representations or disclosures to be acknowledged by a counterparty that are designed to confirm that the Participant's assumptions regarding the counterparty's capability to understand and make independent decisions and non-reliance concerning Transactions with the Participant are correct.
5.4 Providing Additional Information to Counterparties
For a Transaction in which the payment formula is particularly complex or which includes a significant leverage component, a Participant may wish to assist a counterparty in its decision-making process by providing more information (such as loss scenarios) to a counterparty than is typically provided for other types of Transactions. Where loss scenarios are part of the information voluntarily provided to a counterparty, or where loss scenarios are prepared at a counterparty's request and the counterparty does not stipulate some or all of the assumptions to be used in making the calculations, the Participant should attempt in good faith to use assumptions that provide information that is reasonable under the circumstances.
6. Mechanics of Transactions
6.1 When Transactions are Binding
A Transaction should be considered final and binding when entered into in accordance with applicable market practice, whether by oral, written or electronic means.
Transactions should be confirmed as soon as possible and in accordance with applicable market practice. For most types of Transactions, a confirmation (whether sent by mail, telex, facsimile, electronic or other means) provides a necessary final safeguard against errors. All confirmations should be dispatched promptly by one or both parties and reviewed carefully by the receiving party, even when oral checks of the Transactions have been undertaken. The dispatch and checking of confirmations also should be carried out or reviewed independently from those who conduct the Transactions.
6.3 Payment and Settlement Instructions
A Participant should provide its counterparty with standing payment and settlement instructions, and any modifications to those standing instructions should be communicated as quickly as possible to facilitate prompt settlement of Transactions.
A Participant should use, to the greatest extent practicable, standardized or master agreements or comparable arrangements that apply to multiple Transactions, in order to provide standardized terms governing Transactions and to provide for the netting or offset of credit exposures and payment obligations. A Participant should review and where appropriate modify the documentation it uses in connection with Transactions periodically in light of changes in market practice or law.
6.5 Complaints and Settlement of Differences
A Participant should notify its counterparty promptly of any dispute or complaint involving a Transaction in order to mitigate any damages to itself or its counterparty. A Participant should attempt to resolve promptly and fairly any such dispute or complaint. A Participant should ensure that all complaints involving Transactions are promptly and fairly investigated, wherever practicable, by employees or representatives of the Participant who were not directly involved with the disputed Transaction. Such investigations should be construed as an act of prudence to reduce the risk of loss resulting from the dispute, and not as an admission of liability by the Participant.
In addition, upon receiving information that a complaint or dispute involving a Transaction may create market exposure, the Participant should consider all available methods to reduce potential losses from that exposure. Any such steps taken should be construed as an act of prudence and not an admission of liability by the Participant.
7. Standards for Transactions
7.1 Misuse of Market Terminology and Conventions
Traders, brokers, and other employees or representatives of a Participant should use clear and unambiguous language when negotiating Transactions. Recognizing that each type of Transaction may have its own unique terminology, definitions and calculations, a Participant should, prior to engaging in a Transaction, familiarize itself with that type of Transaction's terminology and conventions, and, where necessary, inform its personnel of differences in terminology, conventions and specific terms that may be particularly susceptible to misinterpretation. In addition, no Participant should abuse deliberately market procedures or conventions to obtain an unfair advantage over, or to unfairly prejudice, its counterparties.
7.2 Manipulative Practices
A Participant should not engage in any trading practices that constitute fraudulent, deceptive or manipulative acts or practices under applicable laws and regulations.
7.3 Bribes and Outside Fees and Commissions
No employee or representative of a Participant should offer or solicit explicit inducements to or from employees or representatives of other institutions in exchange for conducting business. It is recognized, however, that entertainment and gifts in reasonable amounts are offered and accepted in the ordinary course of business, and do not necessarily constitute inducements. A Participant should maintain policies and procedures that provide guidance on the provision and receipt of entertainment and gifts by staff.
7.4 Rumors and False Information
A Participant should not spread any rumors or misinformation that the Participant knows or believes to be false or misleading. In addition, a Participant should not disseminate any information that falsely states or implies governmental approval of any institution or Transaction.
7.5 Money Laundering and Other Criminal Activities
A Participant should take measures designed to satisfy itself that its Transactions are not being used to facilitate money laundering or other criminal activities.