. In addition, tradeprocessing and settlement errors can lead to indirect costs, such as compensation payments to counterparts for failed settlements or the development of large losses in a firm’s portfolio as a result of managing the wrong position. Furthermore, investigating problems and negotiating a resolution with a counterparty may carry additional costs. Failure to manage operational risk may also harm a firm’s reputation and contribute to a loss of business
Often operational errors result from a breakdown in the information flow in the sequential steps of the process. To avoid such problems, it is essential that market participants clearly understand each of the seven stages of FX trade and settlement, and fully comprehend how each phase is related to the larger process flow. A break in the process, especially in the feedback loop, may lead to a breakdown in the flow of information, which in turn increases the potential for financial loss. Proper procedures, including those concerning escalation and notification, should be in place for management to deal with problems wherever they occur in the process flow.
In the event of a settlement error, for example, the bank must pay compensation costs to the counterparty and cover short cash positions. Moreover, incorrect financial statements arising from problems in general ledger data can harm the reputation of the bank. Further, if credit positions are not properly updated, the bank may take on more risk to a counterparty, industry, or country than would be prudent. In addition, it is important to note that internal trades should be subject to the same degree of diligence as external trades in terms of timely entry because they carry the same risks (with the exception of credit risk).
To ensure timely processing by operations and eliminate potential errors that can occur if trades are reentered into the operations systems, straight-through processing should exist between sales and trading and operations. Such a link should move deals, adjustments, and cancellations to the operations system as soon as sales and trading finalizes them. This transaction data—also passed straight through to other systems in the institution—will further decrease potential errors that can occur when information is manually keyed into systems. This practice also improves the timeliness of the data.

SSIs allow for complete trade details to be entered quickly, so that the confirmation process can begin as soon after trade execution as possible. In general, when SSIs are in place, it is possible to take full advantage of straightthrough processing because operations may not have to manually intervene in the transaction during the settlement process. SSIs also allow for payments to be formatted properly and for readable SWIFT codes to be issued. If SSIs are not established, operations must contact the counterparty to obtain settlement instructions and the deal record must subsequently be changed to reflect these settlement instructions. The extra work involved in inputting, formatting, and confirming settlement instructions increases the opportunity for errors in settlement, making SSIs important for risk management and efficiency.
If incorrect information was captured in deal entry, certain trades will need to be changed or canceled after they have been released to operations. Mistakes occur when a trader or salesperson enters the wrong counterparty for a deal, an incorrect value date or rate, or makes other data errors.

Both parties should make every effort to send confirmations, or positively affirm trades, within two hours after execution and in no event later than the end of the day. This guideline applies to trades executed with both external and internal counterparties. Any exception to this rule should be clearly documented and approved by operations management and compliance staff. Prompt confirmations are key to the orderly functioning of the marketplace because they minimize