THEORETICAL FRAMEWORK OF FOREIGN EXCHANGE TRANSACTIONS AT
Overview of foreign exchange market
The foreign exchange market, similar to other markets, serves as a platform for buying and selling currencies from various countries in exchange for goods, services, or financial products This international market facilitates transactions among market makers, dealers, and individuals globally, allowing them to trade foreign currencies While foreign exchange transactions can occur anywhere, the market is predominantly recognized as the interbank market, where approximately 85% of all trading volume takes place.
Unlike different types of market, foreign exchange market has some distinctive characteristics, including:
The actual market does not have a visible location but anywhere the exchange for currencies is executed; therefore, it is geographical dispersion
The market works non-stop with the difference of time zone The international forex market runs 24/5 from Monday to Friday and 3 trading sections each day
The core of forex market is the interbank market which is created by commercial banks, foreign exchange brokers and central banks
Participants of the market do business through telephone, telex, fax and satellite communication network, so that the information is transmitted quickly and effectively
Thanks to the globalization of market, information symmetry, huge trading volume, high technology and homogenous goods, the transaction costs are low and can be considered as perfect market
The USD accounts for around 41.5% of currencies traded which is 83% of total transactions
The forex market is very sensitive to the political, economic, social events, psychology and especially monetary and fiscal policies
It is the most perfect and most liquid market with the turnover of almost $4 trillion daily at global scale
The foreign exchange market primarily facilitates international settlements, allowing companies to trade foreign currencies for imports and exports Commercial banks play a crucial role by buying and selling currencies in the interbank market to meet customer demand Additionally, the forex market supports international capital movements, with exchange rates determined by market forces of supply and demand Central banks globally intervene in this market to stabilize exchange rates through foreign currency transactions Furthermore, the forex market offers a trading environment and various hedging instruments, including spot, forward, swaps, futures, and options contracts.
There are four main members of the forex market a Retail clients
Retail clients, including domestic and multinational companies, investors, and various entities, rely on commercial banks to exchange currencies for payments, investments, and hedging against foreign exchange risks Due to mismatches in timing, location, currency types, and transaction volumes, as well as the associated high risks, these clients are unable to conduct currency exchanges independently Consequently, their demand for currency transactions becomes a primary driver of activity in the forex market, making commercial banks essential intermediaries in this process.
Commercial banks participate in the foreign exchange market primarily to serve their customers and to generate profits through trading When facilitating foreign currency transactions for clients, these banks typically do not require significant capital, as the focus is on providing efficient exchange rate services.
Võ Lê Phương ATCB –K12 primarily earns fees through bid-offer spreads, with most commercial banks focusing on this operation for profit However, some large, healthy banks also engage in trading currencies for their own benefit, capitalizing on favorable exchange rate fluctuations This trading requires significant capital and expertise, as banks must manage exchange rate risks and frequent changes in their balance sheet structure Transactions occur in the interbank market, either directly between banks or through brokers.
With the growth of the international forex market, brokerage firms have emerged to facilitate trading between banks Unlike the traditional interbank market, where commercial banks can only transact at the rates offered by one another, brokers source rates from multiple banks to provide competitive quotes with smaller spreads This enables commercial banks to buy currencies at lower rates and sell them at higher rates While brokerage firms must hold a license and charge brokerage fees, they do not engage in trading on their own.
Central banks globally engage in the foreign exchange market with three primary objectives First, they aim to stabilize their domestic currency's exchange rate within a safe range to maintain competitiveness in international trade Second, they actively buy, sell, and transfer currencies to preserve and enhance national foreign reserves, necessitated by the growing interconnectedness of global economic activities This requires holding a diverse portfolio of foreign currencies to hedge against exchange rate fluctuations Lastly, central banks serve as the government's exclusive agent for foreign currency transactions.
Foreign exchange transactions at commercial banks
1.2.1 Organization of foreign exchange transactions
1.2.1.1 Related functional offices in commercial banks
In a commercial bank operating foreign exchange transactions, there are always three offices that have tight bond together, each of them contributes to the efficiency of the transaction
The front office is the hub where dealers engage in direct transactions with other dealers in the interbank market Each day begins with a meeting to establish open exchange rates, review economic information, address current issues, and discuss the business plan The dealing room is responsible for monitoring and managing currency positions continuously while proactively developing solutions Each dealer is fully accountable for transactions within their limits, as well as for their respective profits or losses.
- Back office: its task is to confirm the transaction, make payment, book keep and manage the balance and accounts…
- Mid office: also known as risk management office which check and supervise the limit of dealers and their transaction, especially in speculation
1.2.1.2 Orders in foreign exchange dealing
In the interbank market, dealers utilize various order types to manage their capital while facilitating transactions Each order must clearly specify the price, volume, currency type, order type, and execution time to ensure effective trading.
Limit order: the transaction can only be processed when the current price reaches the limit price
At-the-market order: transaction processed at the best price available in the market
Stop-loss order: at that price the order will be exercised to limit the loss for investors, thus an instrument of capital management
A take-profit order is a strategic tool used by investors to secure profits when a specific price level is reached, as they anticipate potential negative fluctuations in the market thereafter This order helps in effective capital management by allowing investors to lock in gains at a predetermined price point.
There are five foreign exchange operations classified basing on the transaction and trading features They are Spot operation, Forward operation, Swap operation, Currency Option and Currency Future
Spot transactions are the fundamental service offering in the forex market, primarily conducted in the interbank market As implied by its name, a spot transaction involves the immediate buying and selling of currencies at the current spot rate, with payments made promptly upon the transfer of currencies.
The spot rate is influenced by the supply and demand dynamics of the interbank market, where transactions occur continuously and in large volumes As a result, these rates fluctuate every second.
The value date, also known as the payment date, is the designated day when the transferred amount in a transaction is credited to the respective accounts In the context of spot transactions, the value date typically occurs one or two days after the contract date, making spot transactions the most common type in the forex market.
Spot operations are conducted via telephone, telex, electronic systems, and SWIFT, allowing transactions to proceed smoothly and securely without the necessity of a formal paper contract.
Spot operations provide banks with a fast and efficient way to acquire foreign currencies without incurring transaction fees However, the reliance on the instant rates available in the interbank market exposes commercial banks to significant risks, particularly when currency rates experience substantial fluctuations post-transaction.
Spot operation is the most popular foreign exchange transaction in Vietnamese commercial banks with about 80% of forex trading turnover
Foreign exchange transactions which have value date further from the spot value date are forward operations
The forward rate, established today, is utilized for transactions set to occur on a specified future date This rate, integral to the contract, is calculated based on the current spot rate.
In which, F – forward rate, S – Spot rate, P – Forward point
The forward point normally depends on interest rates of two currencies and time to the value date
The forward contract is a financial instrument to buy or sell a certain amount of currency at a specific exchange rate and at predetermined time in the future
A forward transaction is executed in the OTC market, where parties agree on specific amounts, types, timing, and exchange rates The typical value dates for forward contracts are 1, 2, 3, 6, 9, or 12 months, though these can be negotiated This financial operation helps mitigate exchange rate risk when engaging in exports, imports, borrowing, or investing in foreign currencies For example, a company anticipating a need for USD 100,000 in three months for imported goods, and expecting an increase in the USD/VND exchange rate, can purchase USD forward to protect against unfavorable currency fluctuations.
A swap operation involves the simultaneous buying and selling of a specific amount of one currency for another, with differing value dates for each transaction.
A swap contract involves simultaneous agreements between a buying side and a selling side, with differing value dates In the absence of specific terms, the purchase of currency indicates that the quoting bank is acquiring the commodity currency.
Võ Lê Phương ATCB –K12 and the sale of currency means the quoting bank sells the commodity currency The amounts of currency bought and sold are the same
There are two main types of swap contracts based on value dates: spot-forward swaps and forward-forward swaps A spot-forward swap involves one side being spot and the other side being forward, while a forward-forward swap consists of both sides being forward Spot-forward swaps are more commonly used than forward-forward swaps Although these transactions do not alter the overall currency position, they create a time gap between the cash flows of the currencies involved.
The swap rate refers to the exchange rate at which a quoting bank is prepared to conduct a transaction This rate is primarily established by the bank and typically represents the average of the bid and offer rates.
Swap operation is very useful for commercial banks to manage their foreign exchange position and cash flow for short term to achieve the forex trading regulation
Future contracts are commonly used to hedge against exchange rate risks, but they carry the risk of mandatory execution during adverse fluctuations To mitigate this risk, some banks have introduced currency options, which grant buyers the right to decide whether to exercise the contract or let it expire, depending on which option is more advantageous for them.
Effectiveness of foreign exchange transactions
When evaluating the quality of commercial banks in foreign exchange transactions, awarding organizations usually look at the transaction volume, market share, customer
Võ Lê Phương ATCB –K12 services, competitive pricing and modern technology However, the three main criteria are turnover, profit and risk
1.3.1 Turnover of foreign exchange transaction
The turnover in foreign exchange trading of a commercial bank is the transaction volume and value over a period of time Normally, foreign exchange turnover comprises of several categories:
Buying volume: the amount of currencies bought during a period at commercial bank
Selling volume: the amount of currencies sold during a period at commercial bank
Source of currencies: the origin or destination of foreign exchange bought or sold of a commercial bank including its branches, other credit institutions in the interbank market or central bank
Turnover of different transactions: the trading volume or value of each foreign exchange transactions including spot, forward, swap, option and future at a commercial bank
The buying and selling volume are key indicators of a bank's transaction activity over a specific period, showcasing its ability to attract customers A higher transaction volume signifies a larger scale of foreign exchange services offered by the commercial bank, indicating its market share in the local area Additionally, these volumes can be analyzed by breaking them down into different currencies.
Commercial banks closely monitor the sources of currencies, as this indicates their inflow and outflow dynamics A strong reliance on branch-generated currencies suggests successful attraction of both corporate and individual clients, as these are typically the most cost-effective sources Conversely, if a bank must source currencies from the interbank market or the central bank, it signals a challenging short currency position To remain profitable, banks must ensure that their primary outflow of foreign currencies is strategically managed.
Võ Lê Phương ATCB – K12 branches indicate that a high selling turnover to other credit institutions may signal challenges in attracting customers for the bank.
Turnover from various transactions reflects the bank's operational diversification and indicates the proportion of these transactions within the bank's overall turnover.
In brief, turnover in foreign exchange transaction of a commercial bank is used to understand the scale of this service and ability in attracting customers of the bank
1.3.2 Profit of foreign exchange transaction
Profits and losses in foreign exchange trading are generated from the purchase and sale of different currencies at the different rates
When a bank simultaneously buys and sells the same amount of currency, its profit or loss is determined by the spread between the bid and offer rates For instance, if the bank trades USD 1 million, it earns a profit since the bid rate is always lower than the offer rate Conversely, if another entity buys USD 1 million, the bank incurs a loss due to having to pay the higher offer rate for purchasing and receiving the lower bid rate for selling Thus, the spread plays a crucial role in determining financial outcomes Additionally, banks can also buy and sell currency at different times to capitalize on fluctuations in exchange rates, which can lead to either profits or losses.
In reality, to calculate the profit of a bank in foreign exchange transactions, two criteria are employed
Gross profit in foreign exchange for commercial banks is calculated by subtracting gross losses from gross gains A bank achieves gains by selling currency at a higher price and buying it back at a lower price, while losses occur when it purchases currency at a higher rate than the selling price.
Net profit: the final result of providing foreign exchange service after calculating the costs
For example, the profit of a commercial bank in foreign exchange transaction in May
2013 is shown in the below table
Gross profit in forex trading 1,600
Net profit in forex trading 600
The profitability of foreign exchange transactions serves as a key indicator of their effectiveness Greater profits indicate that gains surpass losses, reflecting the bank's successful selection of the optimal time, location, and exchange rate for trading.
1.3.3 Risk in foreign exchange transaction
Foreign exchange trading inherently involves risks due to continuous fluctuations in exchange rates and the vastness of the market, where buyers and sellers may be geographically distant Commercial banks face several common risks in foreign exchange dealings, including market risk, credit risk, and operational risk.
Exchange rate risk: the most common risk when the exchange rate adversely fluctuates than the expectation For instance, the rate rises after selling or decreases after buying
Default risk refers to the potential that a counterparty may fail to fulfill their contractual obligations, such as not buying or selling the agreed-upon amount or failing to make timely payments.
Currency position exposure refers to the risks associated with managing currency flows When a bank holds a long position in a currency, it risks losing value if the currency depreciates and struggles to find buyers Conversely, in a short position, the bank faces the challenge of meeting high customer demand, which can lead to potential losses if it cannot supply the necessary currency.
Technical risk: in foreign exchange transaction, commercial banks equip themselves with many machines and modern online trading programs to update
Võ Lê Phương ATCB –K12 the exchange rates Thus, there always stands a chance of technical risk when the machines break-downs or dealers make mistake in the programs
Risk serves as a key indicator of efficiency in foreign exchange transactions at commercial banks, with a direct correlation: higher risk equates to lower efficiency A bank that encounters frequent default risks often indicates a diminished reputation in the industry.
FOREIGN EXCHANGE TRANSACTIONS: THE CASE OF VBARD
Organizational structure
2.1.1 Overview of VBARD and Agribank Operation Center
The Vietnam Bank for Agriculture and Rural Development was founded on 26 March
Established in 1988, VBARD is the largest commercial bank in Vietnam and one of the four state-owned banks, primarily focusing on financing the agricultural sector With a vast network of approximately 2,300 branches and transaction offices, VBARD serves the highest number of customers in the country Over 25 years, the bank has grown significantly, boasting total assets of nearly 620,000 billion VND and chartered capital of 29,605 billion VND VBARD has also been recognized with numerous awards for its business efficiency and charitable initiatives.
The Agribank Operation Center originated from the VBARD’s Center for Capital and Foreign Exchange Dealing Management, which was established in 2004 through decision number 73/QD/HDQT-TCCB by the VBARD Board of Directors Its primary functions include managing capital and foreign exchange dealings effectively.
The head office of capital dealing management which also performs the regulations of required reserves, exchange rates and foreign exchange positions
Directly dealing in capital and foreign exchange in domestic and international markets
Checking and auditing the interior system in authority of the General Director
Graph 1: Organizational structure of Agribank Operation Center
The foreign exchange transactions in Agribank Operation Center involve the participation of different functional offices
A foreign exchange trading office plays a crucial role in determining exchange rates for internal transactions It engages directly in transactions with branches and actively participates in the interbank market to meet foreign exchange demand and effectively manage currency positions.
Accounting Office: confirms the transactions, double-checks the transactions and makes payment
Planning and risk management office: supervises the process and conducts risk management scheme
SWIFT office: guarantees the efficiency in deals information transmission through SWIFT
Forex Trading Office Risk Management Office Accounting Office
Office Correspondent Banking Office Remmitant Service Office Foreign currency cash Office International Payment Office
Credit Office Telex Office Service and Marketing Office Capital and Planning Office Interior
Legal framework
2.2.1 Regulatory documents from the Government and State bank
Decision 1081/2002/QD-NHNN of State bank Government about currency positions of crediting organizations allowed to operate foreign exchange transactions on 7 October 2002
Foreign exchange ordinance number 28/2004/PL-UBTVQH11 of 11 th Standing committee of National Assembly on 13 December 2005
Decree number 160/2006/ND-CP on 28 December 2006 of the Government with detailed regulation of the foreign exchange ordinance conduction
Decision number 2666/QD-NHNN on 25 November 2009 of State bank government about foreign exchange transaction related regulations
Circular number 26/2009/TT-NHNN on 30 December 2009 from the State bank to regulate on the forex trading of some state-owned corporations and groups
Circular number 20/2011/TT-NHNN from the State bank on buying and selling foreign currency in cash of allowed credit institutions with individuals
Decision number 388/QD-HDQT-QHQT on 5 September 2005 of VBARD President about the foreign exchange management in the bank system
Decision number 2008/QD-NHNo-QHQT of VBARD General Manager about foreign exchange transaction procedure in the system on 16 December 2005
Decision number 321/QD-NHNo-QHQT on 24 March 2006 of VBARD General Manager to clarify and add details to previous regulation
Decision number 906/NHNo-QHQT on 24 March 2006 from VBARD General Manager to operate foreign exchange trading adhere to Document number 497/NHNN-QLNH of the State Bank
Decision number 905/NHNo-QHQT on 24 March 2006 from VBARD General Manager on reinforcing foreign exchange transactions with branches
Decision number 449/QD-SDG-QLRR on 26 November 2012 from the operation center in trading regulation in the online systems.
Effectiveness of foreign exchange transactions at VBARD
According to the responsibility of AOC’s foreign exchange trading office, there are two different transactions: transaction with branch and transaction in the interbank market a Transaction with branch
When a foreign exchange demand emerges at the branch requiring transaction with the operation center, the process conducted at the center is as followed
Foreign exchange trading dealers receive currency purchase or sale requests from branches via telephone, specifying the currency type, amount, operation type, and value date.
Basing on individual trading limit, currency position, dealers actively confirm or refuse the transaction
Dealers provide the best price for branches by checking the current exchange rate on the Reuters screen The branch officer has the option to accept or decline the quote, after which dealers will either confirm the transaction or cancel it.
Step 4: Transaction receipt through IPCAS
The confirmed transaction is then updated on IPCAS with accurate and adequate details for the dealers to check
Step 5: Transaction confirmation on paper
The transaction statement is signed by the office manager
The signed transaction statement is then approved by AOC deputy director
Step 7: Transaction confirmation through IPCAS
The office manager confirms the transaction on IPCAS
Step 8: Documents transfer to Accounting office
The document related to the confirmed transaction is transferred to the accounting office for payment
Step 9: Transaction approval through IPCAS
The employees at accounting office approve the transaction and fax back to the branch
Documents related to the transaction are stored adhere to regulations for management and double checking b Transaction with other credit organization in the interbank market
Branch demand can create a shortage of currency funds, necessitating transactions in the interbank market to meet this need Central dealers at foreign exchange trading offices assess the demand by identifying the types of currency required, the amounts needed, and the timing, which informs their operational decisions and value dates.
Step 2: Trading limit and account balance check
Central dealers check their position limit, trading limit, loss limit and trading limits with partners in different operations
Dealers communicate prices on the Reuter Dealing or RTFX system with other participants Upon agreeing on acceptable prices, they confirm the buy or sell transaction and complete the deal slip for verification.
Office manager confirms by signature on the slip
AOC deputy director approves by signing
Step 6: Transaction updated on IPCAS
The transaction details are updated on the IPCAS
Step 7: Transaction confirm on IPCAS
Office manager confirm the transaction on the IPCAS
Step 8: Documents transfer to Accounting office
The document related to the confirmed transaction is transferred to the accounting office for payment
Step 9: Transaction approval through IPCAS
The employees at accounting office approve the transaction and fax back to the branch
Accounting officers type the payment message and send to partner through SWIFT The SWIFT office checks and processes the message
Documents related to the transaction are stored adhere to regulations for management and double checking
The Vietnam Bank for Agriculture and Rural Development (Agribank) currently engages in three foreign exchange operations: spot, forward, and swap, with regulatory documents for option transactions established since 2005 The Agribank Operation Center primarily collaborates with three types of trading partners—branches, domestic commercial banks, and foreign banks—focusing on meeting the demand from branches, which constitutes approximately 60% of annual transactions While domestic commercial banks are utilized for USD-denominated transactions, the AOC also participates in the international market to address needs for other currencies.
Graph 2: Percentages of foreign exchange operations at AOC in 2012
At AOC Forex trading office, foreign exchange transactions vary slightly across three markets, with overnight and spot transactions being the most favored among branches Typically, the transaction amounts with first and second leveled branches are modest, capping at a maximum of 1 million USD Additionally, the short-term demand from branches renders future and swap contracts less effective.
To optimize currency positions and ensure positive cash flows, AOC's foreign exchange trading office frequently utilized swap and forward contracts In 2012, to address payment demands in EUR and JPY, AOC executed multiple swap contracts, including a EUR/USD swap of 16 million in April, 10 million in July, 100 million in November, and 10 million in December, along with a USD/JPY swap of 100 million in November.
Graph 3: Foreign exchange transactions ratio in 2012 at AOC
Forex transactions in international market
Forex transactions in domestic interbank market
Source: AOC Forex dealing office
At AOC, over 80% of total trading value consists of foreign spot transactions, typically settled within one to two days Swap operations in the international market are conducted over a period of one to three months Due to the operation center's infrequent self-trading in the interbank market, swap transactions that maintain the same currency position are more prevalent than forward transactions.
Table 1: Foreign exchange transaction turnovers 2010 -2012
Turnover of USD denominated buying transactions 2200.17 2618.5 4351.0
Turnover of USD denominated selling transactions 2097.16 2333.12 4085.0
Source: AOC annual income statements The table shows the foreign exchange trading turnover from 2010 to 2012 of AOC Clearly seen from the figures, there are some features as follow:
In 2012, there was a significant rise in USD-denominated transaction turnover for both buying and selling, while transactions in other currencies saw a sharp decline This shift can be attributed to the domestic economic conditions and the regulations imposed by AOC managers The state bank's stringent control over the black market prompted customers to sell or deposit their USD with banks Additionally, AOC's exporter-oriented policy resulted in a substantial influx of USD into the banking system Conversely, the international settlement turnover of the bank decreased, contributing to the decline in foreign currency selling turnover.
In 2011, branches accounted for 90% of AOC's USD sources, increasing to 93% in 2012 While AOC purchased USD from the State Bank in 2011 to meet demand, there were no transactions with the State Bank in 2012 The primary buyers of AOC's USD included branches, interbank entities, and the State Bank Notably, branches represented 55% of the USD selling turnover in 2011, but by 2012, credit institutions emerged as the main buyers Overall, AOC primarily acquired USD from branches and sold it in the interbank market.
Thirdly, the bank was always in long position in both USD and other currencies
Especially, in the case of USD, the annual gaps were relatively big (about 100 million in
Between 2010 and 2012, the bank experienced significant financial inflows, with figures reaching 300 million USD in 2011 and over 260 million USD in 2012 However, due to challenges in acquiring customers for sales and the substantial inflow from branches, the bank faced prolonged exposure to long currency positions over several years.
Agribank provides a diverse range of currencies for international transactions, including USD, EUR, AUD, JPY, GBP, HKD, SGD, CAD, and NZD, along with others like LAK and CNY However, the majority of transactions in the AOC primarily occur in USD/VND, EUR/VND, and JPY/VND.
Source: Foreign exchange trading office
The bar graph indicates that USD/VND transactions are predominantly conducted through branches rather than other credit institutions VBARD possesses a substantial USD supply, leading to a lower volume of USD buying transactions in the interbank market compared to branches Additionally, the center efficiently handles millions in forward or swap contracts in the interbank market, allowing it to mitigate potential shortages of other currencies such as EUR or JPY Consequently, transactions denominated in these other currencies are more prevalent than those conducted through branches.
Graph 5: Forex trading gross profit of some banks in the 2009-2012 period
Source: Annual reports of VBARD, Vietcombank and BIDV
The line graph illustrates the contrasting gross profit trends of three commercial banks in foreign exchange trading BIDV experienced a steady increase in profit, while Vietcombank's profit initially dropped in 2010 before surging dramatically by the end of the period In contrast, VBARD began with a significant loss of 68 billion VND in 2009, but its forex trading profit rose by 300 billion VND annually from 2009 to 2011, only to decline by 50% in 2012, resulting in a profit of 314 billion VND.
In 2012, the bank faced challenges in acquiring customers, leading to the sale of currencies in the interbank market, which restricted profits Furthermore, the decline in export-import activities negatively affected the international settlement service, the primary driver of currency turnover.
Evaluation
Despite not being a specialized commercial bank for foreign exchange trading and having an operational center that has been active for less than a decade, VBARD has achieved significant success in forex transactions.
The Agribank Operation Center has successfully met the demand of branches by efficiently managing NOSTRO accounts with various correspondent banks and foreign currency accounts This enables the center to facilitate quick USD transactions, completing branch requests in just one hour, allowing multiple transactions within a single day Additionally, the center offers competitive exchange rates and fees, aimed at maximizing profits for branches during customer transactions.
To achieve its planned turnover, AOC has strengthened and expanded its relationships with both customers and partners In 2012, the center not only maintained connections with traditional corporate clients but also successfully reached out to new customers By implementing a competitive pricing strategy, particularly in comparison to Vietcombank, AOC has effectively attracted foreign currency deposits from individual clients Additionally, AOC engages in transactions with a diverse range of trading partners, collaborating with 20 Vietnamese commercial banks and 41 foreign banks, including prominent names such as ANZ, BNP Paribas, Citibank, Deutsche Bank, JPMorgan Chase, HSBC, and Standard Chartered.
Third, in 2012, VBARD has made a remarkable achievement in widening the foreign exchange dealing service market share In the domestic market, the first position is
Vietcombank leads the foreign exchange trading market with a share of 16-17%, followed by Vietinbank and BIDV with 8-8.5% and 8-8.2%, respectively Notably, Agribank, which previously ranked ninth or tenth, achieved its highest position ever last year, reaching fifth or sixth with a market share of 4-4.2% This remarkable progress underscores VBARD's commitment to sustainable development in banking services, highlighting its capabilities and positively impacting the overall performance of the banking system.
The operation of foreign exchange offices enhances the efficiency of various banking services, primarily by supporting international settlement operations through timely and accurate foreign currency transactions This efficiency is crucial for providing foreign currency-denominated loans and also benefits remittance services Effective management of account balances and currency positions by the functional offices in AOC ensures that all foreign exchange transactions within the system are executed smoothly and effectively.
Agribank Operation Center is committed to enhancing staff quality through regular training programs and attracting highly qualified employees The foreign exchange dealing office is staffed by young, skilled professionals, many of whom hold master's degrees and possess substantial experience The transfer of personnel from other departments fosters a dynamic work environment, while all employees are well-versed in ISO standards, enabling them to adopt a more professional approach to their tasks.
These achievements are the results from some following reasons:
- Good financial resources and wide branch system
VBARD is the largest Vietnamese bank and also the state-owned bank; therefore, the source of funds available for every operation is always ready Particularly, the amount
Võ Lê Phương ATCB – K12 has received approval from the bank's board of directors to utilize 30% of its capital for foreign exchange operations, a significant allocation that enhances its capabilities in this area.
VBARD, as Vietnam's largest bank with the most extensive network of transaction offices, effectively serves a vast customer base The country's growing economy and international trade policies are driving an increase in potential clients for foreign exchange services Moreover, Agribank's successful strategy to attract foreign exchange from the public significantly enhances its currency inflows.
- Modern technology with standardized payment system
As the first commercial bank in the country to fully implement an interior payment system across its network, VBARD enhances its ability to manage payment and cash flows efficiently among its branches and operational center The IPCAS system further supports this by enabling double-checking of transactions, correcting errors, reducing paperwork, and saving valuable time.
Agribank Operation Center utilizes various software and platforms to meet the specific needs of foreign exchange trading with credit institutions The services offered by Thomson Reuters significantly enhance the exchange rate management process and facilitate partnerships with reliable market players The center is committed to continuously improving software efficiency and collaborating with providers to elevate service standards.
- Accurate regulation from the board of managers
In recent years, the foreign exchange transaction volume and related services at the center have surged, a success attributed to strategic managerial decisions Key policies include providing favorable exchange rates for branches to enhance profitability, offering competitive pricing to attract public funds, and prioritizing support for exporting companies in international settlements.
Võ Lê Phương ATCB –K12 achieved good results Accurate policies will not only lead to good returns but also a better reputation to the brand name
- Regular training courses for staff
Training high-quality staff has been a top priority for Agribank's operation center for many years To achieve this, the center has organized numerous training courses, including 10 transaction skills classes and 3 foreign exchange management classes in 2011, along with 10 programs for new employees In addition to specialized training, staff have also participated in soft skills classes to enhance their working abilities and improve efficiency The office conducts performance evaluations for individual employees to foster responsibility and assess them for quarterly and yearly awards.
Despite many favorable conditions to be the leading commercial bank in foreign exchange trading, the bank faces a number of limitations and problems
Agribank's branches and operation center are not fully utilizing various foreign exchange operations to meet customer needs, manage risks, and generate profits Most transactions are limited to overnight or spot trades, with forward and swap contracts being infrequently employed, primarily to address short-term currency shortages in interbank transactions The short-term nature of branch demands leads to predominantly spot operations Additionally, dealers often fail to provide customers with guidance on securing the necessary amounts in the most advantageous and secure manner The limited range of derivative transactions hampers the bank's ability to effectively hedge risks, and the lack of information, skills, and experience restricts the use of derivatives that could protect clients from exchange rate fluctuations.
Võ Lê Phương ATCB –K12 currency option and currency future have not been in adequate condition to be in practice in spite of the availability of regulating documents
Interbank transaction efficiency remains low, with only slightly over 50% of placed deals being completed, as shown in Table 3 Additionally, a significant portion of these completed deals resulted in losses for the center While most of these loss-generating transactions fell within acceptable limits, this issue requires greater managerial attention.
Third, reaching to the widest area of customers, the number of currencies in trading of
VBARD's currency diversity is lacking, as the predominant currencies used in transactions are USD, EUR, JPY, and GBP Notably, the USD dominates, making up nearly 80% of all transactions, while the other currencies represent only a minimal share.
Fourth, the growth rate of VBARD as a whole and the operation center in particular is unstable and extremely vulnerable to adverse movements from the economy
SOLUTIONS TO ENHANCE THE EFFECTIVENESS OF FOREIGN EXCHANGE
Solutions to the operation center
Heading the transaction of the whole system, Agribank operation center has a very heavy task, yet the center should enhance its activity with these following solutions
The operation center is equipped with modern technology, but foreign exchange transactions demand precise and highly efficient systems As forex trading occurs online, risks such as connection disruptions or external interference are always present To mitigate these issues, a specialized team is essential for troubleshooting and collaborating with providers to enhance system quality Additionally, dealers must be well-versed in the system's functions and processes to minimize errors.
Foreign exchange transactions inherently carry risks, making comprehensive risk management essential at every stage While a dedicated risk management office oversees all services, it is crucial to implement stringent regulations across departments, including forex trading, accounting, and payments, to effectively mitigate risk The center employs a robust policy of three rounds of confirmation for each transaction; however, the high volume of daily transactions limits managers' ability to review each one thoroughly Therefore, enhanced scrutiny at the operational level is vital for effective risk management.
To enhance risk hedging and manage currency positions effectively, the center must proactively forecast demand and exchange rates This can be achieved through various strategies.
Require detailed report from branches in international settlement activity, clarify the near future demand from customers
Assign skillful and knowledgeable employees to study the market and give forecast on the fluctuation of exchange rate
Actively calculate and regularly review the cash flows and currency positions
Make reference from any available and reliable sources
3.1.4 Specify the target and strategy periodically
In today's banking landscape, it is essential for banks to develop comprehensive strategies for foreign exchange activities in both domestic and international markets Exchange rate fluctuations often follow cyclical patterns influenced by economic, political, and social factors Establishing clear targets enables banks to optimize short-term operations, enhance turnover, and effectively respond to external influences Furthermore, these plans should remain flexible to improve overall operational efficiency.
Solutions to VBARD
Despite some existing favorable conditions, VBARD still has to focus on many specific issues to enhance the effectiveness in foreign exchange transactions in the whole system
Foreign exchange services are not a primary focus for most commercial banks, including VBARD, which primarily supports agricultural development Currently, these services are undergoing improvements, but in transaction offices and branches, operations remain inefficient due to excessive paperwork The foreign exchange transaction process is complex across many banks, involving tasks such as currency buying or selling, converting VND-denominated savings accounts, and managing international payment services.
Commercial banks face complex and risky foreign exchange transactions, making it crucial for them to thoroughly understand each operation and relevant regulatory documents To enhance the quality of spot, forward, and swap transactions, banks must identify the key factors affecting pricing, fees, value dates, and processes This clarity will help inform customers effectively, reducing the likelihood of misunderstandings and disputes.
To enhance currency spot transactions, the bank must focus on improving both the quality and quantity of its services through effective customer policies, while maintaining strong relationships with existing clients and attracting new customers.
VBARD needs to enhance its legal framework and finalize contract terms to mitigate potential risks associated with forward and swap transactions These contracts are essential for hedging exchange rate risks, making it crucial for the bank to closely monitor how fluctuations affect their effectiveness.
VBARD is currently holding off on offering currency options and currency futures due to an insufficient legal framework and a lack of confidence from banks These transactions demand a deep understanding of the market and impose significant responsibilities on commercial banks, leading many to postpone the introduction of these services Until the State Bank and individual banks establish comprehensive regulations, currency options and futures will remain unavailable, hindering parties from effectively hedging against exchange rate fluctuations and capitalizing on potential profits.
The effectiveness of foreign exchange transactions relies heavily on both technology and human resources, with the collective capability of the entire team, from managers to tellers, being crucial The manager's expertise is particularly vital, as their skills and adaptability in formulating policies and strategies directly influence the overall process and outcomes By clearly defining goals and fostering a supportive work environment, managers can enhance team performance and drive success in foreign exchange operations.
To enhance operational efficiency, banks must prioritize investing in high-quality staff Employees should be well-versed in regulations and transaction processes, staying updated with the latest regulatory documents Tellers need a strong understanding of financial products to effectively consult with customers, while proficiency in modern technology and English is essential for improving work effectiveness Strong communication skills are crucial for tellers to elevate the bank's public image In summary, as foreign exchange services are highly sensitive to human interaction, banks should focus on selecting exceptional candidates, providing ongoing supervision, and implementing intensive training programs.
VBARD must urgently enhance management practices by implementing detailed regulations due to the increasing number of faulty transactions at branches and the operation center Each request from a branch should undergo thorough review by the branch director prior to engaging with the operation center, minimizing the risk of deal cancellations Additionally, dealers who commit errors should be closely monitored, and their trading limits should be reduced to ensure accountability and improve transaction accuracy.
Customers are essential to a bank's success, driving job creation, salaries, and new customer acquisition Therefore, attracting customers is crucial Banks must identify potential clients with foreign exchange needs, such as personal requirements, investments, or export-import activities, and present them with the most suitable products, highlighting their benefits and clarifying rights and responsibilities To draw in customers, banks should offer competitive pricing and high-quality services Additionally, maintaining communication post-transaction is vital for fostering future cooperation.
In brief, with aim to increase the turnover and enhance the effectiveness in trading,
VBARD should heighten its position in the interbank market by some listing activities:
Attract corporate clients for long-term cooperation by offering better price and fee along with special treats for traditional customers
Develop marketing strategy through advertising, holding conferences and collecting customers’ feedback
Create a suitable pricing policy for specific kinds of customers
Hire law companies to complete derivative contracts’ terms and conditions with customers
Select good staff to train intensively on profession and use them to study deeply the modern services
Maintain and widen the correspondent relationship with foreign commercial banks not only to enhance the effectiveness of international payment but also to learn their experiences and exploit information
In order to gain a deeper understanding of foreign exchange transactions at commercial banks, I have engaged in research and practical experiences at the Agribank Operation Center My internship has revealed numerous intriguing instances where real-world practices align with theoretical concepts.
Foreign exchange is increasingly vital to national economic development, prompting VBARD to modernize and enhance the effectiveness of its forex transactions The bank's notable achievements, including technological reforms, increased turnover, improved services, and employee training, reflect its commitment to this sector In 2012, VBARD ranked as the fifth largest provider of forex services, showcasing its strong performance Nevertheless, challenges remain, particularly in managing currency flows and implementing effective risk hedging mechanisms.
In analyzing the challenges faced in foreign exchange transactions, I have proposed several solutions aimed at enhancing transaction quality for both banks and operation centers It is essential to recognize that no single commercial bank can address all aspects of a foreign exchange transaction independently; rather, it requires collaboration among various stakeholders, including the government, the central bank, commercial banks, and customers I sincerely hope this research provides valuable insights into the functioning of foreign exchange services in commercial banks, which can also benefit other financial institutions in practice.