Currency operations of the spot market - International...

Spot Market Operations

Spot Market is the market for the immediate delivery of currency. Spot deals refer to currency transactions, payments on which are made for a maximum of two working days after the conclusion. The essence of the spot currency transaction is the purchase and sale of foreign currency on the terms of its delivery by counterparty banks at the rate fixed at the time of the transaction.

Spot market serves the needs of acquiring currencies for its portfolio both legal entities and individuals, as well as speculative currency transactions of companies, banks, intermediaries and other participants in the foreign exchange market.

Spot transactions (the delivery of currency on the second working day after the conclusion of the transaction) represent the bulk of cash foreign exchange transactions. But apart from the raccoon transactions, cash transactions on ICBMs include also overnight operations ( overnight ), Tumorrow-next (tomorrow-next) and day-to-day swap, used by banks to create and manage current currency positions.

The spot market is regulated in its operations in accordance with the following principles: execution of transactions mainly on the basis of computer auctions with confirmation of electronic notices within the next business day; the existence of compulsory courses.

If the dealer of a large bank is interested in the quotations of another bank, then the quotes announced to him are mandatory for the execution of the transaction of currency purchase and sale. Spot type transactions are basically conversion operations, i.e. transactions of participants in the ICBM for the exchange of agreed amounts of a monetary unit of one country to the currency of another country at a rate agreed at a certain date. In this case, the spot exchange rate is the current exchange rate. Large banks that carry out the quotation (setting rates) of currencies are called market-makers ( market-maker ). Banks that carry out spot transactions on the basis of these quotes, market-takers.

According to international banking rules, currency rates are usually designated as follows: EUR/USD 1. 2343. The quotation base (base currency) is indicated to the left, the quotation currency (quoted currency, ie the number of quoted currency per unit of the base currency) to the right. The last figures in the writing of the exchange rate are called percentage points. One hundred points constitute the base number - figure & quot ;. In many national currency markets, the procedure quotations is applied in the form of fixing. It consists in determining and registering the interbank rate for each quoted currency pair. Then the established rates of the seller and the buyer for each currency pair are published. A full quote must include the seller's rate and buyer's rate (seller's exchange rate offer, buyer's rate is bid.) The exchange difference between the offer and bid is called a spread or margin and serves as the reference bank for profit on the opposite transactions with customers or other banks. The size of the margin (spread) varies depending on the following factors:

1) the status of the counterparty. The margin is wider for a bank customer than for other participants in the interbank market;

2) market conditions. In an unstable, rapidly changing exchange rate, the margin is usually wider;

3) quoted currency and market liquidity. The margin is wider when quoting a rarely used currency or on operations in a less liquid market;

4) the amount of the transaction. At the ICBM, banks quote standard spreads of five points for deals on average market amounts from 1 to 10 million dollars against the major currencies. More or less large transactions are conducted with a wider spread;

5) the nature of the relationship between counterparties. If this relationship is long and stable, the margin will be narrower.

When trading currency with participants in the foreign exchange market, in particular, banks have counter claims and liabilities in different currencies. The ratio of claims and liabilities for a particular currency to an IBRD member bank forms its currency position in a particular currency that is closed and open. The closed currency position implies the coincidence of requirements and obligations in each particular currency. For example, if it is said that a bank has a closed position on Japanese yens, this means that the requirements and liabilities in the yen for this bank are the same. The open currency position of the bank is long and short & quot ;. Having a bank long currency position indicates that its requirements in the currency exceed liabilities in the same currency. Short currency position shows that the liabilities exceed the requirements in the currency.

The open (long or short) currency position of the bank (ORP) on the spot market consists of an open position for each currency pair and is controlled by the central bank of the country. For example, for a member bank of an ICBM that trades on the spot market in the US dollar, the ORP for that currency will be formed from the US dollar-USD ORP; US dollar - pound sterling, US dollar - Japanese yen, etc. The ORP limit for a particular currency is 15% of the equity of a commercial bank; the total limit of ORP is 30%. The AFP limit for commercial banks in order to reduce currency risk is determined by the national regulator - the central bank. Typically, ORP is recorded in the base currency, most often in US dollars.

The main objectives for conducting currency transactions on spot terms are as follows:

- meeting the needs of clients in foreign currency;

- transfer of capital from one currency to another;

- conducting arbitrage transactions and speculative operations.

Banks use currency spot transactions to maintain the minimum required working balances in foreign banks on LORO and NOSTRO accounts in order to reduce surpluses in one currency and cover the demand for another. With the help of this, banks regulate their working currency position in order to avoid overdraft (uncovered balances on the accounts). To quickly sell or buy currency on an ICBM, banks conduct foreign exchange spot operations. Despite the short delivery time of the currency (up to two working banking days) in the conditions of floating exchange rates, counterparties bear the currency risk on this transaction.

When clients of the bank (firms, individuals, etc.) participate in spot operations, the client makes an application with the purpose of buying (selling) a certain amount of foreign currency in exchange for another. The price of the currency is largely determined by the spread of the bank. Typically, for small-volume transactions, the bank sets a small spread, and for large clients with high ratings, the bank establishes a narrow spread. Such a banking policy for spot transactions for clients allows IBC member banks to profit from foreign exchange spot operations for customers.

A cross-rate is used to service the banking client at the MBP. Cross-rate is the exchange rate between two currencies through a third. Among the most active markets for conversion operations for cross-rates are: pound sterling against the Japanese yen and the euro; euro to the Japanese yen. The basis of the quotation is usually the US dollar. One of the features of cross-rates is that the rates between currencies can be quoted in different ways depending on the bank executing the quotation. There are two methods for calculating cross-rates.

1. If the US dollar serves as the base for quoting both currencies, then to find their cross-rate, one should divide the dollar rates of these currencies. For example, the cross-rate of the Japanese yen (JPY) and the Swiss franc (SFR) is: JPY/SFR = (USD/SFR)// (USD/JPY).

2. If the US dollar is the quotation base for only one currency, it is necessary to multiply the dollar exchange rates of these currencies. For example, the calculation of the cross rate of the pound sterling (indirect quote) to the Japanese yen (direct quote) is as follows: QBP/JPY = QBP/USD x USD/JPY.

When performing foreign exchange operations, the spot on the IBR is traded with non-cash currency or banknotes. Non-cash assets operated by the foreign exchange department of the bank are balances in foreign currency accounts, and the necessary payments are transferred from one account to another by means of an accounting entry. When trading in banknotes, the currency moves physically in space, which increases the cost of transportation, storage, and currency insurance, which increases the spread by the bank's quoting.

The main means of payment for the spot market is electronic transfer through SWIFT channels, which provides all participants with access to a round-the-clock network of banking information transmission in a standard form with a high degree of control and protection against unauthorized access.

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