How Money Markets Work | The currency exchange market consists of about 2,000 trader institutions that are particularly active in forex. Most of the players are commercial or investment banks geographically dispersed in major financial centers around the world. Among these 2,000 dealers, about 100 to 200 members carry out basic trading and market-making activities. The main players are still fewer.
When a merchant buys US dollars, no matter where in the world the transaction takes place, the actual deposit is either directly into a US bank or in a claim by a foreign bank for a US dollar deposit. The same is true for the currency of any other country.
How Money Markets Work
Different countries, different rules
The actual infrastructures of the different currency markets and how they operate are determined by each individual country. Each country imposes its own banking laws, regulations, accounting rules, and tax codes, and each country determines the method of payment and settlement system. Yikes! Doesn’t this mean that you have to know a lot about international monetary laws to be able to trade? Yes – especially if you want to be successful.
Fortunately, there is great global cooperation between exchange regulators, which reduces differences and helps protect forex traders from fraud and abuse. In the US, the US Commodity Futures Trading Commission (CFTC) sets the rules and investigates any issues with trading US currencies. The CFTC reaches agreements, or memoranda of understanding (MOUs) with most major countries that have active currency exchanges. These MOUs are a way for regulatory and enforcement authorities to collaborate across international borders to combat fraud and other illegal practices that could harm customers or threaten market integrity.
If you are planning to get involved in forex, be sure to visit the CFTC website to increase your knowledge of international laws and find information about recently exposed scams and other illegal activities. You definitely do not want to get caught up in a fraudulent deal and lose all your money.
almighty dollar
The US dollar is the most widely traded currency to date. According to a Federal Reserve survey, the dollar is one of two currencies involved in more than 88 percent of all global foreign exchange transactions.
The US dollar wears many hats, serving as an investment currency in many capital markets, a reserve currency for many central banks, a transaction currency for many commodity trades, a bill currency for many contracts, and an intervention currency used by countries that want to influence the values of their currencies.
Organized exchanges
The money market is largely unregulated as a specific market. This means that any commercial bank in the United States does not need any special authorization to trade or deal in foreign exchange. Securities and brokerages do not need special permission from the Securities and Exchange Commission (SEC) or any other regulatory body to carry out foreign exchange activities.
Transactions may be conducted on the basis of any conditions permitted by law and using any mutually acceptable provisions, subject to the commercial law governing commercial transactions. Of course, this means that the money market is the closest thing to the Wild West that you will find in the world of trading. Almost anything goes.
Institutions that participate are not specifically vetted in relation to their exchange practices, but regulatory authorities nonetheless look at trading systems as part of their regular checks of financial institutions, just to ensure they are operating under the country’s commercial banking or securities laws.
Although there are no formal rules or restrictions governing the hours or terms of trading in this over-the-counter (OTC) market in the United States, the trading agreements developed by market participants are mostly valid. An OTC forex market is any currency trading that is conducted outside the confines of an exchange, such as the CME Group. You can find out what these rules are by contacting the Federal Bank of New York, which regularly prepares and updates guidelines for forex trading activities.
These Guidelines describe common market practices and provide “best practice recommendations”. Before you become a trader, protect yourself by making sure that you are working with a merchant or broker who follows these guidelines. You can access the latest revised version in November 2010. The New York Federal Reserve regularly releases updates to the guidelines, which you can find on their website.
The OTC market accounts for more than 90 percent of the total foreign exchange market in the United States, including spot, futures and swaps transactions. If you are new to forex trading, it is safer to start on a regulated exchange, where you can trade currency futures and options for certain currencies. The Chicago Mercantile Exchange (CME) is one of the largest, and provides excellent educational materials to help you get started.
The exchanges and the regulations governing them are very different from the OTC foreign exchange market. Trading is actually done in a central location rather than through a network of computers and phones. Each of the respective exchanges regulates business hours and trading practices, and their products are standardized. Regulated exchanges are also equipped with central clearing houses for cash payments and settlements.