Market structure is a topic that is often skipped over. In practice though, it is vitally important because it defines how clients interact with the trading desk and how the trading desk accesses liquidity to hedge their risk.
In some financial markets all participants access a centralized market or exchange anonymously on the same terms. The FX derivatives market, however, is an over-the-counter (OTC) market, meaning that there is no centralized exchange and a clear distinction exists between banks and their clients. Note that “banks” here refers to large international banks with FX derivatives trading desks.
Fundamentally, bank FX derivatives trading desks transact with clients, aggregate and offset the risk where possible, and close out unwanted residual risk. More specifically: