The interbank market is a decentralised, over-the-counter marketplace where banks and financial institutions engage in forex trading with one another. It is a wholesale market where currency trading is channelled through various market participants either directly or through electronic platforms. While interbank trading is generally proprietary in nature, with banks employing these transactions in their own accounts and at their own risk, it is possible that a few transactions are carried out on behalf of their clients.
Interbank markets can be broadly segregated into the following three groups:
The spot market, or cash market, is an over-the-counter marketplace where currencies are traded for immediate delivery. The standard settlement in the spot market is T+2 working days, with the exception of the Canadian dollar, the Turkish lira, the Philippine peso and the Russian ruble, where the settlement is completed on T+1 working day.
The forward market is another over-the-counter marketplace where customised forward/future contracts are traded, with the settlement taking place on the expiry or the future maturity date of the contract.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a secure network used by financial institutions to send and receive information related to financial transactions. The network connects thousands of financial institutions in hundreds of countries, where tens of millions of messages are exchanged on a day-to-day basis. Although SWIFT is not directly made up of financial transactions, it facilitates payments among institutions associated with it.
Here is a look at the abbreviations for some of the major global currencies:
Source: BIS Triennial Central Bank Survey 2016
Key players in the interbank market
The key participants in the interbank market include central banks, commercial banks, investment banks, hedge funds and large corporations. The goal of all the participants besides the central bank is to profit from forex transactions for which they have dedicated dealers and dealing desks to facilitate the speedy flow of information and support their forex trading operations.
The role of the central banks is to provide liquidity through money market operations, protect the foreign exchange rate from spiralling out of control, and maintain sufficient forex reserves. Some central banks also intervene in the forex markets from time to time to support the home currency during periods of high volatility.
According to the Bank for International Settlements’ (BIS) Triennial Central Bank Survey in 2016, the average daily turnover in the global forex markets stood at $5.1 trillion in April 2016, which is slightly below the $5.4 trillion that was noted in April 2013. Among the total turnover in the foreign exchange markets, FX swaps were the largest traded instruments, accounting for 47% of the total turnover in April 2016; spot FX, meanwhile, contributed 33%.
Among market participants, reporting dealers accounted for 42% of the total turnover in the forex markets in April 2016, compared to 39% in April 2013. The turnover by non-reporting dealers at banks came in at 22%, with institutional investors contributing around 16% of the total turnover during the corresponding period.
Top traded currencies in terms of turnover
The BIS Triennial Central Bank Survey of 2016 showed that the US dollar continued to remain at the forefront as the world’s most dominant currency, contributing to about 88% of all trades in April 2016. The market share of the euro was at a distant 31%, while the Japanese yen garnered 22% of the aggregate market share during the corresponding period. The Australian dollar and the Swiss franc were the other heavily traded currencies, with a market share of 6.9% and 4.8% respectively.
In the emerging markets, the Chinese renminbi jumped to #8 among the most actively traded currencies, with the daily average turnover jumping from $120 billion to $202 billion between April 2013 and April 2016. In addition, the market share of the renminbi surged from 2% to 4% for the corresponding period. The rankings of other emerging market currencies, such as the South Korean won, the Indian rupee and the Thai Baht, also advanced by a few places. In contrast, the turnover in the Mexican peso and the Russian ruble declined significantly.
Here is a look at the top traded currencies and currency pairs: