What next for Thomson Reuters’ FX benchmark?
Thomson Reuters has acquired the WM benchmarks business in a move that makes it arguably the single most-important institution in the global benchmarks industry. It has no plans to change the offering for now, but some wonder whether it could begin a period of change in the broader business, with new providers competing on calculation methodology.
State Street formerly owned and managed the FX benchmark, using Thomson Reuters data. This deal means Thomson Reuters now owns, administers and calculates the WM benchmarks single-handedly, via its subsidiary, Thomson Reuters Benchmarks Services Limited, which it created in 2014.
It continues to employ the same team WM used to operate the service, and is not changing the calculation methodology.
Thomson Reuters has been involved in designing, calculating, administering and distributing benchmarks globally, and in a variety of asset classes, for more than 25 years. It is not taking on any new responsibilities from WM that it did not already manage for its other benchmarks, so the transition for the benchmarks business should be smooth.
The deal involves the acquisition of 159 spot rates, 81 forwards and 11 NDFs.
However, it does present interesting questions for what Thomson Reuters plans to do with the business. The company insists it has no plans for further changes to the process, though it will continue to consult with its clients on an ongoing basis and address any issues that arise.
Given the state of flux in the FX market, though, there is bound to be an opportunity for the FX benchmark to evolve.
Abel Clark, managing director, financial at Thomson Reuters, says: “The FX market is going through significant structural change and is likely to change more in these few years than it has in the last few decades.”
The acquisition certainly puts Thomson Reuters in a strong position in the broader benchmarks business, in which there are relatively few big players.
Thomson Reuters now manages benchmarks for 160 currencies throughout the day, including silver, which the European Commission has designated as one of eight “critical benchmarks” – along with the WM 4pm fix.
Crucially, the way industry uses benchmarks has evolved: Libor was originally about the price of lending; it was nothing to do with valuations. And there is some speculation as to whether Thomson Reuters might have plans to lead its future evolution.
Alex McDonald, WMBA
Alex McDonald, CEO at the Wholesale Markets Brokers’ Association (WMBA), says: “It will be interesting to see if Thomson Reuters evolves its benchmark into something that measures flows, for example tracking volumes via a volume weighted average.
“Is it going to become a fixing venue in the traditional central banking sense, or will it continue to be essentially just a record of the price at or during a given time?”
At its root is the question of what the market wants to use benchmarks for. The WM benchmarks are currently used for various functions, including portfolio valuation, performance measurement, index calculation and price reference.
David Clark, chairman at the WMBA, asks: “Is a benchmark essentially a utility, something the industry needs like water or electricity? Or is it a service that would benefit from competition, in which case what would providers compete on?
“The obvious way to judge a benchmark is on the methodology it uses for calculation, and its robustness in respect of preventing manipulation, but they are difficult things for users to have a view on.”
Methodology could conceivably become a hotter topic for debate. There is little consistency between how benchmarks are calculated. Some, such as WM, take submitted prices, while others, such as silver, entail an auction. Others use an algorithm factoring in bid and offer spreads, published prices and other methodologies.
If they were minded to, there are many more institutions with large amounts of data which could be used as an entry point into the business, championing new methodologies.
There might also be an opportunity for competition: one banker working within corporate treasury observes some clients are now moving away from the 4pm fix, in favour of other benchmarks.
However, it is hard to see the 4pm fix being usurped as the FX benchmark of choice, especially given the structural role it plays in the way Ucits and other funds, and especially passive funds, are managed.
WMBA’s Clark says: “Once a benchmark has established a dominant position in the market it is hard to lose that position. There was a lot of controversy around Libor, but that remains as widely used as ever and there is no demand for anything else to replace it until a risk-free rate can be identified.”
Similarly, WM has come through the considerable controversy around benchmarks and manipulation with its reputation largely intact.
Thomson Reuters’ Clark says: “The issues concerning the manipulation of the fix had little to do with the calculation process, which the authorities found to be fundamentally sound. The issues were largely around the conduct of certain institutions and how the rate was used.”
He notes that the authorities’ recommendations relating to the calculation itself were relatively modest, such as widening the daily measurement window from one minute to five minutes, which WM implemented last year.
David Clark, WMBA
WMBA’s Clark is sceptical about how much difference this change made, suggesting it might have served largely as a tangible and easy-to-understand measure to give the public confidence something had been done about the fixing scandal.
“Has the extension of the window to five minutes made a big difference? Probably not,” he says. “But the improvements in the market abuse directive have certainly been positive for the FX industry.”
A Financial Stability Board report on FX reference rates, which found the WM rate was fundamentally sound, also recommended the creation of a consultation group to act as a watchdog for the benchmarks business. This has also been done.
There are certain to be more changes coming down the line. The EU has already indicated it will announce its intentions for further regulations of benchmarks this year.
WMBA’s Clark says: “I am surprised nothing has been done yet around other important benchmarks such as energy and commodity markets. So far it is only FX, rates, gold, silver and Brent.”
Thomson Reuters believes its scale will give it a natural advantage as the regulatory picture evolves. Its size will allow it to absorb its growing overheads, for example those associated with enhanced surveillance.
Given its role as a key provider of market data, and in particular benchmarks, it is well placed to leverage its existing platforms and relationships to meet the increased regulatory requirements, says Thomson Reuters’ Clark.
Thomson Reuters declined to disclose the price it paid for the WM benchmarks business.