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 6. Foreign exchange markets make extensive use of the latest developments in telecommunications for transmitting as well settling foreign exchange transaction, Explain them.

Foreign exchange (forex) markets rely entirely on advanced telecommunications and computer networks to operate. These systems allow banks to instantly transmit trade details, verify deals, and settle multi-billion dollar currency swaps across the globe without needing a physical, central trading floor. [1, 2]


The two primary systems driving this are SWIFT and clearing houses like CHIPS. [1, 3, 4, 5]



1. Transmitting Transactions: SWIFT


To easily understand SWIFT (Society for Worldwide Interbank Financial Telecommunications), think of it as the ultimate global text messaging app for banks.
  • How it works: It is a secure, encrypted, and highly regulated network that links thousands of financial institutions in hundreds of countries.
  • The Process: When a bank in Mumbai buys US Dollars from a bank in New York, the two banks do not exchange physical cash. Instead, they send a standard digital message over SWIFT. This message details the exact currency amount, the exchange rate, and the accounts to be credited.
  • The Benefit: SWIFT eliminates human error, prevents fraud, and ensures that both ends of the trade agree on every detail within seconds. [4]
2. Settling Transactions: CHIPS and CLS


Think of clearing systems as the digital referees that ensure the actual exchange of money happens smoothly and safely.
  • CHIPS (Clearing House Interbank Payments System): Based in New York, CHIPS is an electronic clearing house used to settle a massive portion of international dollar transactions. Rather than moving millions of individual payments back and forth all day, CHIPS calculates the net balance each bank owes at the end of the day. This cuts down on the amount of money that must be moved.
  • CLS (Continuous Linked Settlement): This is a specialized bank that eliminates "settlement risk" (the risk that one party pays their currency but the other party defaults). CLS links directly to telecommunications networks to process both sides of a currency trade simultaneously. It ensures that Bank A only gives away Rupees if Bank B simultaneously gives away Dollars. [8, 9, 10, 11, 12]
The Real-World Impact


Because of this telecommunications web, the forex market can operate 24 hours a day. A trader in Mumbai can lock in a rate with a counterparty in London at 3:00 PM, send the instructions over SWIFT, and have the transaction settled safely through interconnected computer networks without ever leaving their desk. [1, 6, 13]




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