what is the interbank market 
the interbank market is a global network used by financial institutions to trade currencies and other currency derivatives directly between themselves some interbank trading is done by banks on behalf of large customers but most interbank trading is proprietary it takes place on behalf of the banks own accounts banks around the world use the interbank market to manage their own exchange rate and interest rate risk as well as to take speculative positions based on research the interbank market is a subset of the interdealer market an over the counter otc venue where financial institutions can trade a variety of asset classes among one another and on behalf of their clients this is often facilitated by interdealer brokers idbs understanding the interbank marketthe interbank market for foreign exchange forex serves commercial turnover of currency investments as well as a large amount of speculative short term currency trading the typical maturity term for transactions in the interbank market is overnight or six months 1the forex interdealer market is characterized by large transaction sizes and tight bid ask spreads currency transactions in the interbank market can be either speculative initiated with the sole intention of profiting from a currency move or for the purposes of hedging currency exposure it may also be proprietary but it s customer driven to a lesser extent by an institution s corporate clients these might include exporters and importers history of the interbank forex marketthe interbank forex market developed after the collapse of the bretton woods agreement and following the decision by former u s president richard nixon to take the country off the gold standard in 1971 2currency rates of most of the large industrialized nations were allowed to float freely at that point with only occasional government intervention there s no centralized location for the market because trading takes place simultaneously around the world it stops only for weekends and holidays the advent of the floating rate system coincided with the emergence of low cost computer systems that 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 dollars at once with daily trading volume topping 6 trillion on the market s busiest days 3participants in the interbank marketa bank must be willing to make prices to other participants as well as ask for prices to be considered an interbank market maker interbank deals can top 1 billion in a single deal 1citicorp and jp morgan chase are among the largest players in the united states deutsche bank in germany and hsbc in asia are also among the largest there are several other participants in the interbank market including trading firms and hedge funds they contribute to the setting of exchange rates through their purchase and sale operations but other participants don t have as much of an effect on currency exchange rates as large banks do credit and settlement within the interbank marketmost spot transactions settle two business days after execution t 2 the major exception to this rule is the u s dollar versus the canadian dollar which settles the next day banks must have credit lines with their counterparts to trade even on a spot basis 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 reduces settlement risk it substantially reduces the amount of money that changes hands and thus the risk involved 