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Market Segments: (Structure of FX Market)

The foreign exchange market consists of two main segments - the wholesale interbank market consisting of large transactions between commercial banks and other large institutions, and the retail market consisting of smaller transactions by individuals and smaller businesses. While retail transactions are more numerous, the wholesale market dominates in terms of volume. SWIFT and CHIPS are important payment messaging and settlement systems used by banks and other financial institutions to facilitate international money transfers and trade globally. SWIFT provides secure messaging services while CHIPS and CHAPS are real-time gross settlement systems used primarily in the US and UK respectively to settle large value transactions between banks.

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57 views

Market Segments: (Structure of FX Market)

The foreign exchange market consists of two main segments - the wholesale interbank market consisting of large transactions between commercial banks and other large institutions, and the retail market consisting of smaller transactions by individuals and smaller businesses. While retail transactions are more numerous, the wholesale market dominates in terms of volume. SWIFT and CHIPS are important payment messaging and settlement systems used by banks and other financial institutions to facilitate international money transfers and trade globally. SWIFT provides secure messaging services while CHIPS and CHAPS are real-time gross settlement systems used primarily in the US and UK respectively to settle large value transactions between banks.

Uploaded by

Leo the Bulldog
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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​Market Segments ​(structure of FX market)

The foreign exchange market may be divided into the ​wholesale segment and the retail segment.

The ​wholesale segment​ ​is also known as the ​interbank market,​ as the exchange transactions take
place between banks that are the primary dealers. The size of each transaction in the wholesale
market is very large. Because of its size, the wholesale market remains the focus of study in
international finance.​ I​ t consists of commercial banks, investments banks, central banks,
corporations, and high-net-worth individuals.

The​ ​retail segment​ ​of the foreign exchange market consists of tourists, restaurants, hotels,
shops, banks, and other bodies and individuals. Travellers and other individuals exchange one
currency for another in order to meet their specific requirements. Currency notes, traveller's
cheques, and bank drafts are the common instruments in the retail market. Individuals who
receive foreign remittances and those who send foreign currencies abroad may also participate in
the retail segment of the foreign exchange market.

Although the foreign exchange needs of retail customers are usually small and account for a
small fraction of the turnover in the foreign exchange market, the retail market assumes great
importance, especially for people of small means. This is the reason behind the growing
importance of the retail segment. The transaction costs, however, are higher because of the small
size of the retail segment.

Information and Communication Systems

SWIFT (Society for Worldwide Interbank Financial Telecommunications)

➔ The SWIFT is a global member-owned cooperative that is headquartered in Brussels,


Belgium. It was founded in 1973 by a group of 239 banks from 15 countries which
formed a co-operative utility to develop a​ secure electronic messaging service​ and
common standards to facilitate cross-border payments.

➔ SWIFT is an ​international financial messaging network.​ Financial messages may


include letters of credit, payments, and securities transactions.
➔ In order to use its messaging services, customers need to connect to the SWIFT
environment.

➔ SWIFT does not facilitate funds transfer: rather, ​it sends payment orders​, which must
be settled by correspondent accounts that the institutions have with each other.

➔ The SWIFT is a​ secure financial message carrier​ — in other words, it transports


messages from one bank to its intended bank recipient.
Its core role is to provide a secure transmission channel so that Bank A knows that its
message to Bank B goes to Bank B and no one else. Bank B, in turn, knows that Bank A,
and no one other than Bank A, sent, read or altered the message en route. Banks, of
course, need to have checks in place before actually sending messages.

➔ Messages sent by SWIFT’s customers are authenticated using its ​specialised security
and identification technology. ​Encryption is added as the messages leave the customer
environment and enter the SWIFT Environment.

➔ The SWIFT mechanism also ensures full back-up and recovery capabilities.

➔ SWIFT services are classified into ​four key areas​: securities, treasury and derivatives,
trade services, and payments and cash management.

➔ For money transfers, SWIFT assigns each participating financial organization a ​unique
code with either eight or eleven characters. The code has three interchangeable
names: the bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code​.
➔ For example​, ​the Italian bank UniCredit Banca, headquartered in Milan, has the eight-character
SWIFT code UNCRITMM. The first four characters reflect the institute code (UNCR for UniCredit Banca),
while the next two are the country code (IT for Italy), and the final characters specify the location/city code
(MM for Milan). If an organization decides to use a code with 11 characters, the last three optional
characters can reflect individual branches. For example, the UniCredit Banca branch in Venice may use
the code UNCRITMMZZZ.

Assume a customer of a T.D. Bank branch in Boston wants to send money to his friend who banks at the
UniCredit Banca branch in Venice. The Bostonian can walk into her T.D. Bank branch with her friend’s
account number and UnicaCredit Banca Venice’s unique SWIFT code. T.D. Bank will send a SWIFT
message for a payment transfer to the specific UniCredit Banca branch via its secure network. Once
Unicredit Banca receives the SWIFT message about the incoming payment, it will clear and credit the
money to the her friend’s account.

CHIPS (​Clearing House Interbank Payments System)

➔ CHIPS is the largest private-sector, US dollar-based, money transfer system in the U.S.
It’s a privately operated, and bank owned, system for electronic payments that are
transferred and settled in US dollars.

➔ As a competitor and customer of the Fedwire service of the Federal Reserve, CHIPS
allows banks to make transfers of international payments efficiently, as there’s no need
for bank checks.

➔ When it comes to large transactions, CHIPS is the main clearing house in the United
States. By using electronic bookkeeping entries, it settles, on average, more than $1.5
trillion USD every day

➔ It is owned by a group of financial institutions. Any banking organization with a


regulated U.S. presence can have a share in the ownership of CHIPS and participate in
the network.
➔ As a real-time clearing and settlement system, it continuously matches, nets, and settles
payment orders.
➔ It handles over 95 per cent of all international dollar payments.
➔ CHIPS has many participants, including American Express Bank Ltd, , Bank of America,
Banco do Brasil, Bank of China, State Bank of India, Standard Chartered Bank, and
HSBC Bank.

CHAPS (Clearing House Automated Payments System)


➔ The Clearing House Automated Payment System (“CHAPS”) is the U.K.’s interbank
payment system for large value sterling payments. CHAPS is operated by CHAPS
Clearing Company Limited (“CHAPS Co”).

➔ CHAPS is one of the largest high-value payment systems in the world, providing
efficient, settlement risk-free and irrevocable payments.

➔ Payment obligations between direct participants are settled individually on a gross basis
in RTGS on the same day that they are submitted. The transfer of funds is irrevocable
between the direct participants

➔ For the most part, CHAPS members are large banks. However, other business entities
also use the service through partnerships with primary members

➔ CHAPS payments have several main uses:


◆ Financial institutions and some of the largest businesses use CHAPS to settle
money market and foreign exchange transactions
◆ Corporates use CHAPS for high value and time-sensitive payments such as to
suppliers or for payment of taxes
◆ CHAPS is commonly used by solicitors and conveyancers to complete housing
and other property transactions
◆ Individuals may use CHAPS to buy high-value items such as a car or pay a
deposit for a house

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