There is a lot to learn about Foreign Exchange (FX) transactions. Here we will give a brief overview outlining different types of FX transaction, the lifecycle of an FX transaction and the cut-off times of FX transactions.
Find out more about FX transactions. Download the latest white paper: How to Build a Transactional Banking Fintech Service
Different types of FX transactions
There are different types of FX transactions. For the sake of simplicity we will talk about just two here: Spot and Forward.
- Spot FX Transactions – This involvesimmediately exchanging one currency for another. However, because the FX market has its own language, Spot can mean exchange today, or tomorrow for the day after tomorrow, depending on what currency you need to swap for another.
- Forward FX Transactions – Forward FX is for future delivery of a currency, from three days, to five years in the future.
- FX Currency Swap – Combining both Spot FX Transactions with Forward FX Transactions in opposite buying directions is called a Currency Swap. For deliverable FX fintechs, FX swaps are used to change the settlement dates of forward contracts for customers who choose to settle early or late.
FX transaction lifecycle
Foreign exchange transactions need statuses much like payments, to reflect whether they’ve been captured from the customer. Questions you need to ask include:
- Has the required date elapsed?
- Have they been sent to your liquidity providers?
- Have they been accepted as a transaction by your liquidity providers?
- Are they completed, and is the sell currency now settled into the buy currency?
You’ll also need a status for cancelled transactions or trades that need to be reversed if the customer doesn’t pay for it. You can get around this by requiring the customer to only be able to convert balances of currency they already have in their account with you. However, this does bring more complexity. What if the customer doesn’t have enough funds to do a conversion and payment, for example? What do you prioritise?
FX Cut-off Times
A cut-off time is the deadline that you need to have the currency you wish to sell in the appropriate account. Each currency will have different cut off-times for your bank or liquidity partner to deliver the currency into your bank account. Major currencies, such as the US Dollar, British Pound, Euro, Canadian Dollar and Australian Dollar will be available for delivery on the same day, but with varying cut-off times. The time varies depending on geographical location.
You should consider that same day conversions for some currency exchanges can be very difficult to achieve, because the extreme distance means banking hours never overlap. This knowledge and information must be captured in your system to ensure you don’t commit to any timescale you can’t deliver on.
Additional areas to get to know and become familiar with include FX Transaction Standardisation, Streaming FX Rates, and STP-FX Conversion, as mentioned – there is a huge amount to learn. Download our latest white paper, “How to Build a Transactional Banking Fintech Service” free of charge to learn more. Alternatively you can contact us to speak to an advisor.
