1997 International Foreign Exchange Master Agreement
In the first transaction, Bank B owes 10 monetary units to Bank A as of today on a brand-to-market basis (i.e. the current value is applied). In the second transaction, the office of Bank B, in jurisdiction Y, owes Bank A 5 currency units. In the third transaction between Bank A in jurisdiction X and the branch of Bank B in jurisdiction Z, Bank A Bank B owes 5 currency units. From Bank A`s point of view, Bank B owes 10 currency units for the three transactions on an A 10 market basis, compared to 15 in total, while Bank A Bank B owes 5 currency units. If the netting agreement were fully effective in all legal systems, Bank B would have to owe Bank A a net amount of 10 currency units. However, over the years, the characteristics of the foreign exchange market have changed. Currencies were used, at least initially, as a medium of exchange for commodities and, ultimately, as investments. But it can also be used as a means of speculation and hedging risks in either currency. Initially, many of the market participants were banks, central banks and parties that needed currencies related to international trade.
Recently, due to the increased interest in currencies as a means of investment, there have been many new participants in these markets, including companies and different types of grouped investment vehicles. Hedge funds are important players in the financial markets and have made significant investments in different currencies. Surveys conducted at the time of IFXCO`s inception showed that, although there have been some significant changes in the forex market since 1997 and although many new contracts have been concluded with an updated ISDA framework contract (from 2002), many participants have still used the IFEMA (and FEOMA) agreements. This is usually explained either by the fact that they had been executed and not replaced some time before, or because the counterparties (including, at that time, many non-traders like hedge funds) only intended to trade foreign exchange and/or monetary options transactions, preferring iFEMA and FEOMA, as these were simpler deals. IFEMA was created by the Foreign Exchange Committee, sponsored but independent of the Federal Reserve Bank of New York, and the British Bankers` Association. In each jurisdiction, agreements have been developed by the private sector; However, central banks and banking supervisors in the various administrations have been informed of developments in the private sector. An international foreign exchange master agreement (IFEMA) is a framework agreement between two parties for spot and forward transactions in the foreign exchange (Forex) market. A framework contract is a standardised contract between two parties that establishes standard conditions applicable to all such transactions between the parties. The IFEMA agreement covers all facets of these forex transactions and provides detailed practices for creating and processing a forex contract. In addition to the contractual conditions, IFEMA explains the consequences of delay, force majeure or other unforeseen circumstances. These concepts have been incorporated into the documentation, known as framework agreements in many types of trade.