Nigeria’s economy is set for major gains as the naira which has been sitting at 315 to a dollar on the interbank market for what would seem like forever, has finally moved to 321. This is a major endorsement by the financial markets of the economic policies and aggressive interventions of the the Central Bank Of Nigeria, CBN, in the foreign exchange market; with the stated objective of ensuring monetary and price stability and maintaining external reserves, the end game being safeguarding the international value of the Naira.
The Interbank market is the the top most level on which foreign exchange market transactions are conducted. Contrary to popular belief the Interbank is not an exchange; it is a collection of communication agreements between the world’s largest money center banks.
The structure of the Interbank market is such that there are multiple participating banks connected via a form of BANKS ONLY ECN (Electronic Communications Network). Each participating bank operates independently of the others until it needs currency that another participating bank possesses. At that point it will contact the other participating bank electronically and request access to the necessary currency.
If the participating bank’s systems are working properly and the bank has given the requester bank authorization to do so, the currency can be accessed and the initiating bank’s request can be fulfilled. With thousands of banks all over the world and hundreds of currencies, this process requires facilitation, which is where EBS services come in.
Determining prices and currency inventory on the Interbank market without a central facilitator is analogous to finding resources on a computer network without a server. The same difficulty will arise when it comes to keeping track of who has what resources. A bank say in Nigeria or elsewhere will rarely transact business with a company that needs to exchange some South African Rand and it can be difficult to arrive at an exchange rate.
BANKS ONLY ECNs (Electronic Communications Networks) worldwide and their communication links are connected to a central clearing service. The EBS (and Reuters) service enables banks to see how much and at what prices all the Interbank market members worldwide are willing to transact. EBS is not a market or a market maker; it is an application used to see bids and offers from all banks worldwide. EBS is a major facilitator of price discovery in the interbank market.