Wider Window for FX Benchmarks?

Global regulators ponder options for preventing manipulation of WM/Reuters benchmark rates.

Global regulators published details of their plans to overhaul foreign-exchange (FX) benchmarks in response to allegations that traders colluded to manipulate rates in the $5.3 trillion-a-day currency market.

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

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

At least a dozen regulators on three continents are investigating whether traders in the world’s largest financial market colluded with counterparts at other firms to manipulate benchmarks such as WM/Reuters rates, which are used by money managers and pension funds to determine what they pay for foreign 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, is also analyzing whether there’s a need for “alternative benchmark calculations” prepared over longer time periods of as much as 24 hours, according to a statement posted on the group’s website today.

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

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

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


Benchmark Manipulation

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

The proposals are among 15 recommendations put forward by the group to transform rate setting and bolster safeguards against manipulation. The plans were prepared by an expert group at the FSB led by Paul Fisher, deputy head of the Prudential Regulation Authority at the Bank of England, and Guy Debelle, assistant governor at the Reserve Bank of Australia.

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

WM/Reuters rates are published hourly for 160 currencies and half-hourly for the 21 most-traded. The benchmarks are based on trades in a minute-long period starting 30 seconds before the beginning of each half-hour. The most widely used is the so-called 4 p.m. London fix.

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

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

Traders used chat rooms to share information about their clients’ positions with counterparts at other banks in the minutes before 4 p.m., and agreed to push trades through together during the fix to maximize their impact on the benchmark, Bloomberg News reported last year.

The Bank of England said in February that it’s reviewing allegations that its officials condoned sharing client information going into the fix as it could reduce volatility.


Sensitive Time

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

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

Further recommendations for the setting of WM/Reuters rates are being prepared by the International Organization of Securities Commissions, a global association of market regulators, the FSB said.

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

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

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

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