Interbank FX Explained

Interbank Forex Market

The Interbank Forex Market is the foundational platform for direct currency trading among financial institutions, primarily banks. It operates as a decentralized system, without a central exchange or clearinghouse, enabling institutions to manage their own trades and risks. While some transactions serve large clients, many trades occur on behalf of the banks’ own accounts.

Features and Importance

Decentralized Nature

The interbank forex market differs from other financial markets as there is no centralized exchange or single record. Transactions happen across various global platforms, allowing trades to be executed continuously without a clearinghouse.  

High Volume

With an approximate daily trading volume of $5 trillion, the forex market is the largest financial market worldwide. Its participants include banks, forex brokers, corporations, hedge funds, retail investors, central banks, and institutional investors.  

Influence on Exchange Rates

Primary market makers, including large banks like Deutsche Bank and HSBC, set baseline exchange rates that influence currency pricing globally. These interbank transactions impact demand for currencies and their exchange rates, allowing banks to manage currency and interest rate risks.

Key Players and Structure

Elite Banks

The majority of forex volume is conducted by around ten major banks, such as UBS, Citigroup, and HSBC. These banks act as intermediaries for central banks and governments, setting benchmark rates used by their clients.

Foreign Exchange Sales and Trading Departments

Many banks operate specialized FX desks where sales teams coordinate with dealers to execute client orders. These departments also offer risk management tools for businesses to manage currency fluctuations effectively.

Trading Currencies  

The interbank market primarily deals with prominent currency pairs, known as the majors, while certain divisions within banks focus on exotic currencies, such as the Mexican peso.