How does the Interbank FX Market Work?

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Wednesday, February 18, 2015 6:54 PM / Research


The Interbank Foreign Exchange Market (IFM) is the market ‘within banks’ as trading between them represents an agreement to exchange the approved amounts of currency at the specified rate.


Simply put, the IFM is the top-level foreign exchange market where banks exchange different currencies.


The IFM is usually described as “the financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks' own accounts”.


INVESTOPEDIA explains 'Interbank Market' thus:

The interbank market for forex serves commercial turnover of currency investments as well as a large amount of speculative, short-term currency trading.


According to data compiled in 2004 by the Bank for International Settlements, approximately 50% of all forex transactions are strictly interbank trades.


The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thomson Reuters Dealing are the two competitors in the electronic brokering platform business and together connect thousands of banks the world over.


The currencies of most developed countries have floating exchange rates.


These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies.


The interbank market is an important segment of the foreign exchange market as it is the wholesale market through which most currency transactions are channeled.


It is mainly used for trading among bankers.


The three main constituents of the interbank market are

         the spot market

         the forward market

         SWIFT (Society for World-Wide Interbank Financial Telecommunications)


The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place.


In Nigeria however, the market is regulated by the Central Bank of Nigeria (CBN) and according to information sourced from the FMDQ portal, the ‘forex’ market operates thus:


·         The standard currencies, for which quotes must always be given, are USD/Naira ($/N) 


·         Quotes may be given for third currencies by mutual agreement


·         Quotes given are only valid for a minimum of 20 seconds for telephone and screen-based transactions


·         A maximum of two types of quotes (e.g. for spot and one forward transaction) are allowed per request, although more may be given by mutual agreement


FMDQ may declare a trading halt in circumstances where trading activity:

·         is being or could be undertaken by persons possessing unpublished price-sensitive information that relates to FX product


·         Is being influenced by a manipulative or deceptive trading practice iii. may otherwise give rise to an artificial price for that FX product


·         where the bond market becomes illiquid due to some external event


·         Dealing should be done on an approved FMDQ medium, i.e. telephone, Reuters, Bloomberg, etc.


·         Trading members should regard themselves as bound to a deal once the price and volume have been agreed


·          A deal is consummated when the requesting member confirms buying or selling the stated amount at the offer or bid rate indicated by the quoting member


·         After quoting, a trader cannot refuse to deal if the requesting member decides to lift (buy) or hit (sell) at either of the rates quoted.


·         To reduce the incidence of disputes, dealers are advised to reconfirm transaction details


·         Both trading members should state clearly at the outset, prior to a transaction being executed, the qualifying conditions to which it will be subject.


·         These include quotations which are subject to the necessary credit approval, margins for forward transactions etc.


·         Where trading is done via telephone, the use of recording equipment in the offices of members is mandatory to expedite conflict resolution


·         All trading members should be required to have telephone recording equipment and telephone transactions must be recorded.


·         Tapes should be kept for at least two months after the maturity date of the contracts


·         Tapes which cover any transaction which is in dispute should be retained until the problem has been resolved


·         Verbal agreements are considered binding


·         The subsequent confirmation is regarded as evidence of the deal, but should not override terms agreed verbally


·         Confirmations (whether mailed, telexed or sent by other electronic means) provide an opportunity for dealing errors to be identified and rectified with the minimum of delay and possible cost


·         Standard confirmation letters should be exchanged within 48 hours


·         The standard letters/agreements, whose penalty clauses cannot be altered by individual counterparties, are attached as Appendices Three to Six 


·         Any trading member that fails to receive a confirmation should query the matter with the counterparty as soon as possible


·         Upon receipt, all confirmations must immediately be thoroughly checked and appropriate action taken to rectify any differences i


·         If the confirmation is considered incorrect, the counterparty must immediately be informed, and an amended confirmation should be provided by the trading member whose original confirmation was incorrect


·         Payment in local currency shall be effected through RTGS by transferor



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