Market Structure

Understanding the difference between the primary market and the interbank market is key to understanding the formation of market reference rates, which we will explore in the next section.

Primary Market

What is it? It is the "retail" market, where the public (companies and individuals) trades directly with authorized financial institutions (banks, brokers). This is where most people and companies operate.

Who participates? On one side, end customers (importers, exporters, tourists, investors). On the other, financial institutions.

What is the objective? To meet a need of the real economy. It is the actual entry or exit of foreign currency from the country for a specific purpose:

• Entry (Inflow): An exporter sells the dollars received from the sale of soybeans.
• Exit (Outflow): A tourist buys dollars to take on a trip.

Interbank Market

What is it? It is the "wholesale" market, where foreign currency transactions occur exclusively between the financial institutions themselves. The public does not have access to this market.

Who participates? Only authorized banks and brokers among themselves.

What is the objective? To allow banks to manage their own liquidity and adjust their dollar cash positions. For example:

If "Bank A" sold many dollars to its clients (in the primary market) and needs more, it buys from "Bank B," which may have bought more dollars from other clients.

These transactions happen in very high volumes and throughout the day.