Global regulators published details of their plans to overhaulforeign-exchange (FX) benchmarks in response to allegations thattraders colluded to manipulate rates in the $5.3 trillion-a-daycurrency market.

The Financial Stability Board (FSB) proposed changing how themost popular rates, from WM/Reuters, are calculated by extendingthe length of the one-minute windows on which the benchmark is based, andrequiring firms to install systems to address potential conflictsof interest with clients. The Basel, Switzerland-based FSB set anAug. 12 deadline for comments on the plan.

There are “clear benefits to having a wider window,” the FSBsaid in its report. “More data points would be available to helpfix the rate, and it would be harder to manipulate.”

At least a dozen regulators on three continents areinvestigating whether traders in the world's largest financialmarket colluded with counterparts at other firms to manipulate benchmarks such as WM/Reuters rates, which are usedby money managers and pension funds to determine what they pay forforeign currency. More than 25 traders have been fired or suspended across the industry.

The FSB, led by Mark Carney, governor of the Bank of England, isalso analyzing whether there's a need for “alternative benchmarkcalculations” prepared over longer time periods of as much as 24hours, according to a statement posted on the group's websitetoday.

ACI International, an association representing people working inforeign exchange, said regulators should focus on people who abusethe system rather than changing the rate-setting process.

“It is the manner in which it is used by certain marketparticipants that must be scrutinized,” Marshall Bailey, presidentof the Paris-based association, said in an e-mail. “It comes downto the behavior of individual market participants, and the abilityof their supervisors to enforce high standards through effectiveoversight and governance.”

The FSB consists of regulators and central bankers from aroundthe world who seek to harmonize global financial rules. The board,which reports to the Group of 20 nations, set up a task force lastyear to try to repair or replace tarnished benchmarks in the wakeof attempts to manipulate the London interbank offered rate, or Libor. It saidin February that it would extend this work into currency-marketbenchmarks.

Benchmark Manipulation

“There will always be a temptation to manipulate financialbenchmarks, as there is with the results of sporting events,”Michael Wainwright, a partner at law firm Dentons in London, saidby e-mail. “The challenge for those who construct and administer abenchmark is to minimize the temptation by making the benchmarkinherently resistant to manipulation.”

The proposals are among 15 recommendations put forward by thegroup to transform rate setting and bolster safeguards againstmanipulation. The plans were prepared by an expert group at the FSBled by Paul Fisher, deputy head of the Prudential RegulationAuthority at the Bank of England, and Guy Debelle, assistantgovernor at the Reserve Bank of Australia.

The group stopped short of proposing guidelines for centralbanks that publish reference rates, saying “it is theresponsibility of each to set internal procedures.”

WM/Reuters rates are published hourly for 160 currencies andhalf-hourly for the 21 most-traded. The benchmarks are based ontrades in a minute-long period starting 30 seconds before thebeginning of each half-hour. The most widely used is the so-called4 p.m. London fix.

There is a “concentration of trading by dealers during thecalculation window, although trading volumes start to rise shortlyahead of the fixing time,” the FSB said.

“At a minimum, this creates optics of dealers 'trading ahead' ofthe fix even if the dealer is managing the risk in relation totheir client orders,” it said. “Worse, it can also create anopportunity and an incentive for those dealers to manipulate themarket to make it more likely that the market price at the fixgenerates a rate which results in a profit from their fixtrading.”

Traders used chat rooms to share information about theirclients' positions with counterparts at other banks in the minutesbefore 4 p.m., and agreed to push trades through together duringthe fix to maximize their impact on the benchmark, Bloomberg Newsreported last year.

The Bank of England said in February that it's reviewingallegations that its officials condoned sharing client informationgoing into the fix as it could reduce volatility.

Sensitive Time

The FSB is seeking views on whether the fix should start or endexactly on the hour, rather than be centered around it, and whetherthe time should be moved from its 4 p.m. spot.

“Market-making dealers should generally be aware of which timesof day are most likely to be disrupted by news releases, andclients should be advised not to use fix rates at those times orwhen important data is due,” the FSB said.

Further recommendations for the setting of WM/Reuters rates arebeing prepared by the International Organization of SecuritiesCommissions, a global association of market regulators, the FSBsaid.

Bloomberg LP competes with Thomson Reuters in providing news andinformation, as well as currency-trading systems and pricing data.Bloomberg LP also distributes the WM/Reuters rates on Bloombergterminals.

The FSB is also “interested in seeking feedback from marketparticipants on the development of a global/central utility fororder-matching to facilitate fixing orders from any marketparticipants,” the FSB said.

Such a facility would need to be “well governed and capitalized,with the risks understood,” ACI's Bailey said. “The unintendedconsequences of further concentration of FX flows may not be whatthe regulators and supervisors want.”

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