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Interbank Forex

By: EconomyWatch Date: 23 July 2009

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The interbank forex market is a financial system of currency trading among the world’s largest banks and financial institutions. This currency exchange takes place directly among banks or via electronic brokering platforms, such as Electronic Brokering Services (EBS) and Reuters Dealing 3000 Matching. Both these platforms offer trading in the major currency pairs. Trading in cross currency pairs is typically not supported by these platforms. The major currency pairs primarily traded on these systems are:

EBS

EUR/USD
USD/JPY
EUR/JPY
EUR/CHF
USD/CHF

Reuters

GBP/USD
EUR/GBP
USD/CAD
AUD/USD
NZD/USD

The Interbank Forex Market: Basics

The interbank forex market is decentralized and unregulated. It does not have a specific location where the transactions are recorded. The interbank foreign exchange market is an important component of the larger forex market. It is a wholesale market having three major segments, which are:

the spot market – In the spot interbank forex market currencies are traded and delivered immediately.
the forward market – This market deals in contracts for future delivery.
SWIFT – The Society for Worldwide Interbank Financial Telecommunications is a worldwide network for exchanging messages between banks and other financial institutions.

Most interbank trading is conducted from the banks' own accounts, while some interbank trading activity is undertaken by banks on behalf of their largest customers.

Who Determines the Interbank Forex Rates?

Each bank sets its own forex prices. However, given stiff competition and a large number of players in the market, the prices determined by different banks do not vary significantly. The factors considered by banks to determine forex prices include:

volume available at the current price level
current economic and political environment
their opinion on the prospects of various currency pairs
their inventory levels

Central banks play a key role in determining the interbank exchange rates. This is because the central banks have the power to alter interest rates. High interest rates prompt traders to buy currency from banks, exerting upward pressure on the value of the currency. Central banks can also buy and sell currencies to alter supply, thus impacting prices.