Interbank Forex Market

Interbank Forex Market

The Interbank Forex Market is a global platform used by financial institutions to exchange currencies within themselves. Although some interbank dealing is performed by banks on account of big clients, much of it is proprietary and takes place on behalf of the bank’s own accounts.

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Features and Importance:

The forex or currency market is a decentralized market where there isn’t one “exchange” where every trade is recorded. Trades are executed on numerous exchanges worldwide with no need for a single exchange list characterization. Also, there is no clearinghouse as well for FX transactions. Instead, each market maker or financial institution is expected to record and maintain their own trades.

The foreign exchange market (forex) has an average daily trade volume of $5 trillion which makes it the largest market in the world. Market participants include forex brokers, hedge funds, retail investors, corporations, central banks, governments, and institutional investors like pension funds.  The trading activities of interbank impacts the demand for currencies and their exchange rates. However, the primary market makers, which are the large banks that execute a significant amount of the forex trading volume, provide the baseline exchange rates on which all other trade pricing are based. Banks use this interbank market to manage exchange rate and interest rate risk.

Key Players and Functioning:

Most of the total forex volume is transacted through around 10 banks. These banks are well-established brand names, which include Deutsche Bank, UBS, Citigroup, and HSBC. Government and central banks have their own unified forex trading networks, but they still use the biggest institutional banks in the world. The elite group of institutional investment banks is mainly responsible for setting rates for interbank and institutional clients of the bank and for offsetting this risk with the other clients on the opposite side of the trade.

The structure of each bank varies, but most banks would have a separate division called the  Foreign Exchange Sales and Trading Department. This desk normally takes over orders from the customer, obtains a quote from the spot dealer, and passes the quotation back to the customer to see whether they wish to proceed with the order. While online foreign exchange dealing is becoming more popular, several companies still deal closely with an FX advisor at a financial institution’s trading desk. The consultants also provide risk management tools for companies intended to minimize disruptive currency exchange rate fluctuations.

Institutional traders usually don’t allow for customized crossing. Forex interbank desks usually only deal with the most prominent currency pairs (called the majors). In addition, trading divisions may have a dedicated broker primarily responsible for exotic currencies or exotic currency transactions, such as the Mexican peso. Much like the forex market, the forex interbank market is accessible 24 hours a day.

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Final Thoughts:

The forex interbank market is a subset of the overall forex market, which in turn comprises the largest trading market globally. Due to its volume and institutional insight, it is a driving force of both pricing and operation in the entire currency market. Trading divisions are well suited for this market and have distinctive experience in currencies and pricing movements. Because of the significant notional amounts being traded, the clients trading in the interbank forex market profit from transactional costs.


Author: Mahek Medh

About the Author: Currently, I am in my second-year bachelor’s program and over the period of time I have realized that I enjoy learning about numbers and money, and I find topics of Finance to very interesting thus this is the domain and space where I wish to etch my long term career.



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