Introduction

The purpose of an FX forward is to lock in an exchange rate between two currencies at a future date. For customers who use forwards to hedge underlying exposure, the use of forwards is to minimise currency risk. This might be done, for instance, if a company is contractually obliged to pay a set amount for the future delivery of goods in a foreign currency and wishes to lock in the rate at time of purchase.

Trading in financial products always involves risks. As a general rule, you should therefore only trade in financial products if you understand them and the associated risks. You should carefully consider your objectives, level of experience and risk appetite. While Bound does not provide advice, we will assess whether the financial instruments are appropriate for you. As required by the FCA (COBS 3) and in line with good practise we will also categorise you as Retail, Per Se or Elective Professional or Eligible Counterparty. We will advise you of your categorisation. 

As a customer of Bound, you will not be speculating and have confirmed to us that you are using our products for commercial hedging purposes only. Bound reserves the right to discontinue the relationship should we determine you are speculatively trading.

There is considerable exposure to risk in any foreign exchange transaction, including, but not limited to credit and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. There is also differentiated regulatory protection depending on the products you are trading e.g. Spot FX and Exempt Forwards are not regulated in the UK and for example there are no association client money protection requirements (see Client Money below).

You should read this document carefully so that you understand what you are buying, and then keep it safe for future reference. This document should be read in conjunction with Bound’s Terms and Conditions. 

We do not provide or offer financial, legal, accounting or tax advice. You should seek your own financial, legal, accounting or tax advice from a suitably qualified professional if required.

The following describes the Key Features and Risks from regulated and unregulated FX Forwards. All of our hedging strategies use FX forwards. There are no options employed unless we explicitly state the use of an option.

What are the Key Features of booking FX Forwards with Bound?

1. Our capacity 

• We deal on a matched principal basis. This means that when we enter into an FX Contract with you, we will always be the counterparty and we cover our risk immediately with our back-end liquidity providers.

2. FX Forwards are bespoke

• FX forwards are custom, over-the-counter (OTC) agreements between two parties that allow flexible terms—including amount, settlement date, and currencies. In contrast, FX futures are standardized contracts traded on exchanges on a set future date 

3. Exchange rates, quotes and orders

• When you use the Bound Platform the request to enter into a FX Forward, we will provide you with a quote which will include our indicative exchange rate, costs, fees and charges

• If Bound provides you with a quote, we are responsible for setting the price, exchange rates, and quotes. This means that our prices, exchange rates, and quotes may be different from the market, as well those provided by exchanges, trading platforms and/or other brokers. FX forward pricing is determined by adjusting the prevailing spot exchange rate to reflect the interest rate differential between the two currencies over the contract term. 

• You can place an Order to enter into a FX Forward by using our Platform. These include Market Orders, Limit Orders and Stop Orders.

4. Settlement

• FX forwards are usually physically settled (i.e., the actual currencies are exchanged), but some variants—like non-deliverable forwards (NDFs)—are cash-settled based on the difference between the agreed and market rates.

5. Margin

• Bound may, from time to time, request that a customer posts margin against a trading position. These funds are required in order to protect Bound from losses should a customer default on their obligations or become insolvent. 

6. Cancellation or partial reductions in the nominal

• Early cancellation may be provided at Bound’s sole discretion. Should a customer wish to close a position early or reduce the nominal, there may be costs involved, including settlement of any relevant mark to market amount (this may also be positive). 

7. Client Money Protection and FSCS

• Where you are transacting in regulated FX Forwards with Bound e.g. a Non-Deliverable Forward Bound is required to segregate and protect customer balances or positive Mark to Market balances in accordance with the FCA’s Client Money (CASS) rules. See more on how your money is protected here. 

• Were Bound to fail your funds would be separate from the Bound estate. Please note any shortfalls, however caused, and the costs involved in returning the funds are paid from the client money pool and all claimants on the pool share in the loss rateably. You may be eligible to make a claim for any losses from the Financial Services Compensation Scheme (FSCS). See more on FSCS in our Terms and Conditions. 

What are the risks involved in FX Forwards?

1. Market risk

• Opportunity costs: While entering into a forward contract guarantees a known rate of exchange at maturity, it is possible that on expiry the prevailing FX spot market rate could be preferable to that agreed in the forward contract and thus you may have been in a better position having not initially entered into the hedge.

• Margin calls leading to cashflow risk

• If your FX position is out of the money, i.e. the agreed rate is worse than the current market rate, we may ask you to post margin. You will need to have available funds to  post the margin. 

2. FX Forwards are bilateral contracts between you and Bound

• Credit or Counterparty Risk: By entering into a bilateral contract a customer is taking on counterparty risk to Bound. In the event that Bound should default on its obligations either by becoming insolvent or otherwise, a customer may not receive back the full market value if positive for them. Where you have no other FX counterparty, their transactions and any FX exposure would become unhedged. 

• Conflicts of interest: Conflicts arising from Bound’s business model are managed through internal controls and processes detailed in the Conflicts of Interest policy which can be found on the website. 

• While Bound generally operates on a Matched Principal basis i.e. we execute a customer trade and also a matched trade with a liquidity provider Bound may take and /or hold positions that conflict with those of our customers. More details around the treatment and execution of client orders can be found in our Best Execution Policy which can be found on the website.

3. In extreme scenarios it may be difficult to make changes or book new trades

• FX markets are generally liquid, however volatility can depend on the currency pair. G10 currency pairs will offer greater liquidity than more emerging market currency pairs. It may be difficult or costly to unwind or modify a forward contract before maturity, especially for less commonly traded currencies.

4. Limited client money protection. Funds in settlement or funds held under Title Transfer Collateral Arrangement (“TTCA”)

• Where funds are in settlement or under TTCA they are not segregated and protected. This means that if Bound were to fail during this limited period your funds would not be segregated from Bound’s funds and you would need to make a claim, as a creditor, with the administrator of the firm. This could lead to a delay in a return of your funds and possible loss. 

• TTCA is a legal arrangement that gives Bound ownership of the customer margin funds whilst they are in the possession of Bound. Bound can therefore utilise these funds as required for liquidity or investment purposes as is deemed necessary. You will be notified if your margin is being held under TTCA.