The FX market is under intense scrutiny as regulators around the world investigate allegations of price-rigging and collusion between traders.
The FX market is enormous and oversight is modest. As calls for tighter regulation snowball, questions are being asked about whether a new benchmark is required.
Earlier this year, almost 600 respondents to Euromoney’s FX Survey answered a question about what should replace the FX fix benchmark. The majority of those who answered said the fix should remain the same – to continue using the joint WM Company and Thomson Reuters fix, as the chart shows.
Source: Euromoney Research Group
However, the suggestions from those who did want to see change were wildly different and worthy of note. Furthermore, when the results were sorted by institution type and size, there were some interesting differences.
The second most-popular answer from the total survey was to draw on a system in use elsewhere in financial markets. These ranged from volume- or time-weighted fixes, to one taken from either a particular bank, or a blended rate from several banks.
Various FX trading firms and platforms received votes of confidence, including CME, GTX, Icap-owned EBS and Platts. Some even suggested the revamped and tightened Libor regime would be a good replacement. Others looked to New York or London closing prices for guidance.
Bloomberg’s BFIX was the outright favourite for a straight swap of benchmarks when looking at the overall result.
When the results were filtered to show the responses from banks, sticking with the existing benchmark was the clear favourite.
However, when focusing on the answers from non-financial corporates, “don’t know” became the most popular answer. The same was true for private investors who took the survey, demonstrating a higher level of uncertainty in these groups.
Of those who replied “don’t know”, the feeling was one approaching hopelessness. “How would the change of benchmark assist?” lamented one respondent. The issue of market-participant credibility was raised frequently.
“It doesn’t matter [which benchmark is used],” said one person. “Traders are paid to trade around whatever benchmark exists and changing the benchmark won’t get rid of unscrupulous people.”
Another said: “Any benchmark can be manipulated; must have close oversight of any system or process that is utilized.”
Transparency came up frequently. Only a system whereby prices and trades are displayed clearly could the problems be solved, many said.
There was talk of a new benchmark – one agreed upon by all the G10 countries – from one respondent, perhaps aiming beyond the realms of possibility.
The ACI, the global FX market’s main industry umbrella group, recently appointed Marshall Bailey as its first full-time president. Minutes of the May 6 meeting of the FX committee of the European Central Bank show Bailey was invited to present the ACI’s model code, which includes rules of behaviour among traders, and discussed ways to review and update it.
With a growing membership, it could be that getting market participants to sign up to the code could be an important step in the right direction.
In the UK, the chancellor of the exchequer George Osborne announced on June 12 that the Treasury, the Bank of England and the Financial Conduct Authority will conduct a year-long investigation – the Fair and Effective Markets Review – into standards in the fixed income, currency and commodity markets.
Bailey says the review is a positive development.
“George Osborne’s leadership is very welcome and is the right approach to restoring the reputation of the FX market,” he tells Euromoney. “The comprehensive review announced by the Chancellor will do much to reassure markets, investors and the public if done in conjunction with unbiased industry leaders.
“While the market’s structure is broadly very effective and well designed, we have a duty to the global financial system to ensure we repair where needed.”
With regard to the creation of a new benchmark, Bailey urges patience.
“The 4pm fix has been under a lot of scrutiny and, as with Libor, there have been widespread calls to replace the benchmark,” he says. “We must await the outcome of the investigation and review that is currently under way, work closely with the market and regulators to determine the best path forward and reflect on what the FX industry can do to learn the lessons from recent events.
“The reform is unlikely to be a change in benchmark-calculation methodology, but rather a change in the way they’re used by asset managers and their bankers.”
Despite not wanting to rush ahead with a complete change to the way the benchmark is calculated, Bailey recognizes that those who have been found to be manipulating the market should be dealt with swiftly.
“Let’s get the wrongdoers out, by all means, but let’s assist those seeking to evolve and improve to do so,” he says. “All serious market participants seek clarity on the rules to help them work most fairly and effectively for their clients.”
Do away with it
The call from respondents for the benchmark to be removed altogether was, perhaps, surprisingly strong.
“Benchmarks as we know them are dated,” said one commentator. “Modern technology/e-commerce enables many alternatives without relying on a specific benchmark.”
Another said: “Fixing rates are ridiculous and antiquated. They should be eliminated entirely as they serve no purpose.”
However, of those who called for the removal of the system, there were limited suggestions of how the market would be overseen and priced more effectively.
“[The fix] is a ridiculous target by company treasurers to take the risk out of execution,” one respondent said. “Sorry, but risk is inherent in execution in this business,” he added, perhaps championing the ‘leave them all to it’ approach.
“These funds should just all deal at spot and be done with it,” said another. “Be a big boy and take the market.”
Filtering the results by the amount of FX volume traded produces some remarkable differences. The largest participants, who individually traded in excess of $250 billion of FX in 2013, would like to see an existing fix used instead of the WM/Reuters benchmark.
Bloomberg’s popularity diminished, however, with a benchmark set by one or more central bank leaping to third.
At the other end of the scale, those who traded less than $5 billion wanted to see the status quo retained.