Offering FX forwards to clients

For example, a company knows it will have to make a payment in US dollars in three months. To determine the costs early on, it wants to hedge the exchange rate today. For a payment service provider, it might make sense to offer the customer a corresponding FX forward in addition to the actual payment processing.

The economic rationale is understandable. The regulatory assessment, however, is considerably more complex. The fact that a transaction is described as an FX forward, foreign exchange forward transaction, or hedging instrument answers neither the question of authorisation nor the question of applicable conduct and market infrastructure obligations.

The assessment must consider the entire business model: Who is the customer’s counterparty? What funds are received? How long are they held? Are they used exclusively for settlement or also for financing? Is an individually negotiated transaction being concluded or a standardised product being distributed? And is it even a financial service within the meaning of FinSA?

Before introducing such a service, Swiss payment service providers should examine five questions in particular:

1. Are customer funds accepted or held?
2. Is the FX forward ancillary to the payment service?
3. Does the transaction serve the purpose of hedging or speculation?
4. What requirements may arise from FinIA, FinSA and FinMIA?
5. How should the product, processes, and controls be designed?

The starting point for the analysis under banking law is regularly not the foreign exchange business as such, but the treatment of the associated customer funds.

Anyone who accepts repayable funds from the public on a professional basis without the relevant authorisation may fall within the scope of the Banking Act. Whether funds qualify as public deposits depends not only on their designation in the contract, but also on their legal and economic function.

In an FX forward, the following cash flows may be particularly relevant:

• Advance payments or settlement amounts transferred early;
• Credit balances on settlement or customer accounts;
• Margins and collateral;
• Unused remaining balances; as well as
• Customer funds that remain with the provider until settlement.

For payment service providers, the exceptions under Art. 5 para. 3 lit. a and lit. c  Banking Ordinance (BO) may be particularly relevant.

Article 5(3)(c) of the BO applies to non-interest-bearing credit balances on customer accounts of certain or comparable companies, provided the funds are used solely for processing customer transactions and are generally forwarded or refunded within 60 days. This is not a general exemption for all funds received in any connection with a transaction. Whether a payment service provider qualifies as a comparable company and meets all the requirements must be assessed on the basis of its specific business model.

For FX forwards with a settlement period exceeding 60 days, the early transfer of the entire settlement amount cannot therefore be readily based on the settlement account exception.

In addition, Article 5(3)(a) of the BO may be relevant. According to this provision, certain funds that constitute consideration under a contract or are transferred as security are not considered public deposits. Margins or collateral may fall under this exception if they genuinely serve to secure a specifically defined obligation and are not functionally used to finance the provider or its own market positions.

The decisive factors are the purpose, duration, and actual use of the funds. If customer funds are systematically held for extended periods, repeatedly deployed or otherwise used, or used to finance business operations or the company's own risk positions, this argues against a mere settlement or collateral function.

FINMA practice also distinguishes between settlement and investment. According to FINMA-RS 08/3, foreign exchange traders who maintain accounts for their clients to invest in different currencies do not fall under the settlement account exemption. However, this does not mean that every FX activity of a payment service provider automatically qualifies as typical bank-based foreign exchange trading. The decisive factor remains the specific structure of the acceptance of funds.

In the case of a payment service provider, the FX forward can be directly linked to a specific payment order or a foreseeable cross-border payment flow.

For example, it is conceivable that a customer sets an exchange rate today for a payment due in three months, and the payment service provider simultaneously handles the conversion and forwarding to the payee upon maturity. In such a scenario, the FX forward functionally serves to hedge and manage an operational payment risk.

This ancillary nature can be an important element in the regulatory classification. However, it is not an independent statutory exemption. Even an FX forward directly linked to a payment must be assessed on the basis of the relevant requirements of the Banking Act (BA), the Banking Ordinance (BO), the Financial Institutions Act (FinIA), the Financial Services Act (FinSA), and the Financial Market Infrastructure Act (FinMIA).

The following circumstances, in particular, may argue against a merely accessory character:

• The customer can open positions without reference to a specific or sufficiently determinable cash flow.
• The positions are held or repeatedly rolled over, regardless of the underlying transaction.
• The volume significantly exceeds the risk to be economically hedged.
• The customer can maintain open currency positions independently of a payment service.
• The marketing focuses on potential profits from exchange rate movements rather than limiting existing risks.
• Customer funds remain with the provider longer than is necessary for the specific processing.

The contractual documentation should clearly illustrate the relationship between the underlying transaction, hedging, and payment processing. However, contractual clauses alone are not decisive. If actual business practice deviates from the documented structure, the economic reality is generally the determining factor for the supervisory assessment.

For providers affiliated with an SRO, an important distinction must be noted: membership in a self-regulatory organisation primarily concerns the monitoring of anti-money laundering obligations. It does not replace any authorisation that may be required under the Banking Act or the Financial Institutions Act, nor does it replace the separate review of obligations under the Financial Services Act and the Financial Market Infrastructure Act.

Hedging and speculation can technically be carried out using the same financial instrument. Therefore, the distinction cannot be made solely on the basis of the product name or the subjective declarations of the parties involved.

A hedging transaction generally serves to reduce an existing or sufficiently anticipated risk. Speculation, on the other hand, is characterised by the fact that a market price risk is assumed or increased independently of a corresponding underlying transaction in order to profit from expected market movements.

The following objective criteria, in particular, may indicate a hedging character:

• There is an identifiable underlying transaction or a sufficiently specific foreign currency position.
• The volume of the FX forward is in a factually justifiable proportion to the hedged risk.
• The maturity of the forward contract generally corresponds to the duration of the underlying exposure.
• The transaction is embedded in an operational payment, treasury, or risk management process.
• Any over- or under-hedging can be explained by understandable operational reasons.
• No independent return objective is pursued through the financial instrument.

The fact that an FX forward subsequently has a positive market value or leads to an economic advantage does not automatically make the transaction a speculative position. What matters is the purpose it served at the time of its conclusion and how it is treated during its term.

Conversely, the designation “hedge” is not sufficient. A transaction may exhibit speculative elements if the position significantly exceeds the underlying transaction, is continued after the underlying exposure has ceased, or is actively managed to generate trading profits.

The distinction between hedging and speculation is relevant from a supervisory perspective, but it constitutes neither an independent authorisation requirement nor a general exception. A genuine hedging transaction must still be assessed on the basis of the applicable legal requirements. Conversely, a speculative transaction does not in itself trigger an authorisation requirement.

Internal guidelines, limits, approval processes, and documented linkage to the underlying transaction can provide objective evidence of the hedging purpose. Depending on the business model, such measures may be legally required, necessary to justify regulatory classification, or advisable as good governance practice.

The permissibility of own-account hedging does not answer the separate question of under what conditions a payment service provider can offer comparable instruments to its customers.

FinIA: Is the activity subject to Art. 12 or Art. 41 FinIA?

For the licensing question, Articles 12 and 41 of the Financial Institutions Act (FinIA) must be examined separately. While Article 12 FinIA covers certain activities on the primary market, Article 41 FinIA regulates other forms of securities trading on a professional basis as a securities firm. With regard to Article 12 FinIA, it must be examined in particular whether the following requirements are cumulatively met:

1. the provider primarily operates in the financial sector;
2. the provider acts on a professional basis;
3. the provider creates derivatives in the form of securities; and
4. these are offered publicly on the primary market.
5. If such an activity exists, a licence as a securities firm or bank is generally required.

In the case of a genuinely individually negotiated FX forward, created for a specific counterparty and concluded bilaterally on client-specific terms, there are strong arguments against classifying it as a derivative in the form of a security. This is especially true if the instrument is neither standardised nor suitable for mass trading.

The assessment may differ if products are distributed in a standardised form, under recurring conditions, or to a larger number of customers. Therefore, the designation of a transaction as "OTC" or "bilateral" is not the sole determining factor.

It must be examined separately whether a public offer exists. An individualized offer to a specifically named customer is generally not directed at an unlimited group of people. However, restricting an offer to professional customers does not in itself preclude its public nature. An offer to an indefinite number of professional customers can still be considered public.

The prospectus exemption for offers aimed exclusively at professional clients must also be distinguished from the licensing issue under Art. 12 FinIA. An exemption from the prospectus requirement does not automatically mean that all conditions for a licensing requirement are waived.

Finally, it must be assessed whether primary market activity is taking place at all. A payment service provider that concludes an individually negotiated FX forward with an existing client initially enters into a bilateral contractual relationship. This differs structurally from the professional creation and public placement of standardised derivative securities.

For individually negotiated, non-standardised, and bilaterally offered OTC hedging derivatives to existing professional clients, there are therefore compelling arguments against the application of Art. 12 FinIA. However, this is not an explicit statutory exception or a published FINMA safe harbour. The specific product and distribution structure remains decisive.

Irrespective of Article 12 of the FinIA, it must also be examined whether an activity requiring authorisation as a securities firm exists under Article 41 FinIA, specifically as a client dealer, own-account dealer, or market maker. Such an authorisation requirement may exist even if Article 12 FinIA is not applicable. Article 41 FinIA also requires the relevant activity to relate to securities for these activities. If the specific, individually negotiated OTC FX forward does not qualify as a security, this argues against its application. For standardised derivatives or derivatives suitable for mass trading, however, Article 41 FinIA must be examined separately.

FINSA: Is a financial service being provided?

Even if neither Art. 12 nor Art. 41 FinIA establishes an authorisation requirement in individual cases, this does not automatically create a regulatory-free space.

First, it must be examined whether the specific offer constitutes a financial service within the meaning of Art. 3 lit. c FinSA. This is particularly likely if the provider acquires or disposes of financial instruments for the client or receives and transmits orders in relation to financial instruments.

The classification may be less clear if the payment service provider is itself the counterparty to a bilaterally concluded OTC transaction and does not provide any additional execution, brokerage or advisory services. The specific contract and service structure therefore need to be analysed separately.

Where a financial service is involved, the applicable obligations depend, among other things, on the type of service and the customer category. The FinSA distinguishes between retail customers, professional customers, and institutional customers.

An appropriateness or suitability assessment is not required for every financial service in the same way. Different requirements apply to the mere execution or transmission of client orders than to transaction-related or portfolio-related investment advice or asset management.

For professional clients, legal presumptions apply regarding the necessary knowledge, experience, and financial capacity. Under the statutory conditions, professional clients may also waive certain information, documentation, and accountability obligations. However, this does not constitute a general exemption from all FinSA requirements. The statutory rules of conduct generally do not apply to institutional clients. Specific client segmentation and any opt-in or opt-out declarations must be documented. FINMA has specified its supervisory practice regarding key FinSA conduct obligations in Circular 2025/2.

Furthermore, qualification as a professional client under FinSA does not automatically mean that this client’s funds are exempt from the definition of public deposits under the Banking Ordinance. In particular, the banking law category of institutional investor with professional treasury operations must be examined independently.

FinMIA: What derivatives obligations apply?

Regardless of whether an authorisation is required, requirements may exist under the FinMIA.

The following should be checked in particular:

• the classification of the payment service provider and the customer as a financial or non-financial counterparty;
• the qualification as a small or large counterparty;
• Any reporting obligations and the legal allocation of reporting responsibility;
• risk mitigation obligations for non-centrally cleared OTC derivatives; as well as
• Applicable exceptions for certain products or transaction methods.

Article 98 paragraph 3 FinMIA excludes certain derivatives transactions intended to reduce risks from the calculation of the thresholds for small non-financial counterparties. This provision thus recognises the special economic function of hedging. However, it does not constitute a general exemption from authorisation, reporting, conduct, or other derivatives obligations.

Depending on the specific structure, further exceptions must be examined, for example, for certain currency swaps and currency forward transactions in which physical settlement is ensured. Whether and which FinMIA obligations exist depends on the counterparty classification, the statutory allocation of the respective obligation, the specific transaction, and any applicable exceptions.

A regulatory perimeter analysis should not end with legal qualification. Its findings must be reflected in product design, contract architecture, operational processes, and the internal control system.

Depending on the business model and regulatory classification, the following measures may be legally required, necessary for documenting regulatory qualifications, or advisable as good governance practice.

Before introducing an FX forward offering, the following points should be determined in particular:

• which customer categories are allowed to use the product;
• which underlying transactions or foreign currency exposures are considered eligible for hedging;
• which instruments, currencies, volumes and maturities are permitted;
• how the link between the underlying transaction and the FX forward is demonstrated;
• how margins, collateral and settlement funds are received, recorded and used;
• how unused funds will be returned;
• how to identify unjustifiable over-hedging or open positions;
• which licensing requirements under FinIA and which obligations under FinSA and FinMIA apply to the respective situation; and
• when a transaction must be rejected or subjected to a more in-depth compliance review.

A corresponding control framework may include, in particular, the following elements:

• a documented product approval process;
• a regulatory perimeter and authorisation analysis;
• an end-to-end representation of the flows of money, collateral, and transactions;
• Criteria for identifying and documenting the underlying transaction;
• volume, maturity and limit controls;
• Customer segmentation methods;
• appropriate customer information and risk warnings;
• Rules for the treatment of margin and collateral;
• processes for counterparty classification and for fulfilling any reporting and risk mitigation obligations;
• Guidelines for dealing with conflicts of interest; as well as
• a regular review to ensure that actual business practices correspond to the approved model.

Contracts and product documentation should precisely describe the economic purpose, payment and collateral mechanisms, and the roles of the parties. However, they do not replace actual implementation. If client funds, positions, or collateral are treated differently in practice than contractually stipulated, this can alter the regulatory classification.

Conclusion

The regulatory classification of an FX forward is not solely determined by the instrument used. Crucial factors include the interplay of its economic function, client money flows, product standardization, distribution method, counterparty structure, and client category.

For genuinely individually negotiated, non-standardised, and bilaterally offered OTC FX forwards that serve to hedge a specific risk for an existing professional client, there are compelling arguments against the application of Art. 12 FinIA. However, any potential licensing requirement as a securities firm under Art. 41 FinIA must be examined separately. This does not, however, imply a blanket statutory exemption or a general regulatory safe harbour.

Similarly, a documented hedging purpose does not automatically exempt a company from the scope of the Banking Act, Financial Institutions Act, Financial Services Act, or Financial Market Infrastructure Act. Each of these regulations is subject to its own specific requirements, which must be examined based on the concrete business model.

Payment service providers should therefore integrate the regulatory perimeter analysis into product development at an early stage and repeat it whenever the client base, product structure, handling of client funds or distribution model changes materially.