What is the 'Interbank Market'

The interbank market is the financial system of trading currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is done by banks on behalf of large customers, most interbank trading is proprietary, meaning that it takes place on behalf of the banks' own accounts.

BREAKING DOWN 'Interbank Market'

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.

Background

The interbank foreign exchange market developed after the collapse of the Bretton Woods agreement and following the decision by U.S. President Richard Nixon to take the country off the gold standard in 1971. Currency rates of most of the large industrialized nations were allowed to float freely at that point, with only occasional government intervention. There is no centralized location for the market, as trading takes place simultaneously around the world, stopping only for weekends and holidays.

The advent of the floating rate system coincided with the emergence of low-cost computer systems with allowed increasingly rapid trading on a global basis. Voice brokers over telephone systems matched buyers and sellers in the early days of interbank forex trading, but they were gradually replaced by computerized systems that could scan large numbers of traders for the best prices. Trading systems from Reuters and Bloomberg allow banks to trade billions of dollar instantaneously, with daily trading volume topping $6 trillion on the market's busiest days.

Largest Participants

In order to be considered an interbank market maker, a bank must be willing to make prices to other participants as well as asking for prices. The minimum size for an interbank deal is $5 million, but most transactions are much larger, and can top $1 billion in a single deal. Among the largest players are Citicorp and JP Morgan Chase in the United States; Deutsche Bank in Germany; and HSBC in Asia.

Credit and Settlement

Most spot transactions settle two business days after execution; the major exception is the U.S. dollar vs. the Canadian dollar, which settles the next day. This means that banks must have credit lines with their counterparts in order to trade, even on a spot basis. In order to reduce settlement risk, most banks have netting agreements that require the offset of transactions in the same currency pair that settle on the same date with the same counterpart. This substantially reduces the amount of money that changes hands and thus the risk involved.

RELATED TERMS
  1. Interbank Rate

    The rate of interest charged on short-term loans made between ...
  2. No Dealing Desk

    A way of forex trading that provides immediate access to the ...
  3. Euro Overnight Index Average - ...

    The weighted average of overnight Euro Interbank Offer Rates ...
  4. Real Time Gross Settlement - RTGS

    The continuous settlement of payments on an individual order ...
  5. Interbank Deposits

    Any deposit that is held by one bank for another bank. In most ...
  6. Hong Kong Interbank Offer Rate ...

    An interest rate stated in Hong Kong dollars on the lending and ...
Related Articles
  1. Investing

    The Foreign Exchange Interbank Market

    Can your forex broker offer you the most competitive pricing? Learn how the market's biggest players affect you.
  2. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  3. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
  4. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  5. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  6. Trading

    Popular Forex Currencies

    Learn about the most traded currencies and the strategies used to trade them.
  7. Trading

    Why It's Important To Regulate Foreign Exchange

    In an increasingly globalized economy, the significance of the foreign exchange marketplace cannot be underestimated.
RELATED FAQS
  1. What is the difference between LIBID and LIBOR?

    Both LIBID and LIBOR are rates primarily used by banks in the London interbank market. The London interbank market is a wholesale ... Read Answer >>
  2. What is the difference between LIBOR, LIBID and LIMEAN?

    LIBOR, LIBID and LIMEAN are all reference rates used to benchmark short-term interest rates. The London Interbank Offered ... Read Answer >>
  3. What is a liquidity squeeze?

    A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding ... Read Answer >>
  4. What are the differences between the Federal Funds Rate and LIBOR?

    Learn the key differences between the federal funds rate and the London Interbank Offered Rate, including currency denomination ... Read Answer >>
  5. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  6. Who determines the LIBOR rate?

    Learn about what the LIBOR rate is, how it is determined and calculated, and who determines what the LIBOR rate on a daily ... Read Answer >>
Hot Definitions
  1. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  2. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  3. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  4. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  5. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  6. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
Trading Center