How Really A Transaction Settlement Takes Place In A Forex Market?

 

The major advancement in technology has greatly helped the foreign exchange markets to maintain continuous telecommunications for effectively handling the transactions. One such sole network used by financial institutions to transfer messages and conduct exchanges like CHIPS is referred as ‘SWIFT’.

  • The expansion goes as ‘Society for Worldwide Interbank Financial Telecommunications’.
  • This is co-operative society owned and regulated by almost 275 banks across the world and as the name suggests it is a communication network coordinated especially for international financial markets guiding them in foreign transactions and interactions.
  • Further, this network links nearly 30,000 financial firms globally each issued with an identifiable code. In addition to these, local and national processors connect the regional and national banks to the center.
  • SWIFT’y networking systems perform the following tasks:
  1. Assist in making all the international payments and statements.
  2. Helps in immediate text transferring with international as well as national banking systems and makes it economical.
  3. Maintains the security and accuracy of the communication system thus increasing the reliability.
  4. Powered by the quality of stability, messages delivered are clear and exact, and no possible sort of ambiguity is present to revert for clarifications. This is so because universal standards and formats are used for conducting transactions.
  5. This further reduces the response and execution time enabling the system to be highly efficient and thus deliver a quality service.
  6. Additionally, this network keeps the automated records of all bank transaction driving all regional banks to adopt internal automation activities.

CHIPS

  • Abbreviation for ‘Clearing House Interbank Payment System
  • This is an automated payment system held by 12 commercial type private banks and presently, it constitutes the world’s largest payment system.
  • Foreign exchanges including Euro-Dollar transactions are conducted via CHIPS and tallies payments of each and every single day and finally settle with a receipt. This probably avoids the use of any cheques or ready cash for exchange.
  • Helps in directly speeding up reconciliation and thereby lowering the entry passing through different systems like Fedwire.

Quotation Process of settlement

  • There are two modes in which a quote for the exchange is rated by interbank and includes
  1. The money requested by the interbank to buy a foreign currency
  2. The money needed to sell the foreign currency
  • Another way is
  1. Direct: This indicates the exchange of foreign currency with domestic currency in a forex market.
  2. Indirect type: includes the quotation scheme which offers a specific quantity of foreign currency per unit of domestic currency.