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).

 

KEY TAKEAWAYS

  • The interbank market is a global network used by financial institutions to trade currencies and other currency derivatives directly between themselves.
  • Banks use the interbank market to manage their own exchange rate and interest rate risk.
  • They can also use the market to take speculative positions based on research.
  • Most transactions within the interbank network are for a short duration, anywhere from overnight to six months.

Understanding the Interbank Market

The 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.

 

The 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.


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