Commercial Banks and FX Dealers
The first question that many business owners will ask is why these rules should be applied to them. Their business has international exposure and they do use international payment systems to service their financial obligations or pay their suppliers. They have business accounts in respectable large commercial banks that offer wire transfer services and they never felt the need to complicate things by looking for an alternative FX broker.
To answer that question, we need to understand how large commercial banks process international wire transfers. When international payment is made between accounts in two different currencies (e.g. Pound Sterling and the Euro), the FX rate at which the currency is converted is set by the bank. Currencies are liquid assets and are traded on financial exchanges which determine an equitable “market rate” that satisfies both buyers and sellers of FX.
And yet the rates which the banks use are not proper market rate. Instead, they are picked by the bank for their own benefit, typically several times a day. Sometimes the bank’s FX rate is similar to the market rate, but quite often the bank rate would “lag” the market rate and be out of sync with it. On small personal transactions, that difference may be negligible. But modern UK businesses need to deal with sums that can run into hundreds of thousands of pounds, and a miniscule FX rate difference can mean hundreds of pounds in savings.
(Source: CMC Markets, Date: 24 May 2018)
By comparison, a dedicated FX broker can buy foreign currency directly from the market using live prices. To illustrate the difference between using the bank model and the FX broker model, let us examine this intraday chart for GBP/EUR currency pair.
A bank that sets their FX rate twice a day (e.g. morning and late afternoon) would use market prices when GBP/EUR can potentially be trading at session lows, while a dedicated FX dealer can constantly monitor the markets and wait till mid-day to secure a more favourable exchange rate.
