Thomson Reuters has unveiled the WM/Reuters 2pm CET benchmark, a new FX benchmark service for corporates.
It is Thomson Reuters' first benchmark launch since it acquired the WM benchmarks business in April, and is not expected to be the last. Tobias Sproehnle, global head of benchmarks at Thomson Reuters, says: “Given our commitment to continually enhance the offering and invest into the further development of the WM/Reuters benchmarks, we will have a strong focus on developing the benchmarks further in order for them to continue to be the market standard in the FX world.”
But the choice and timing of this new benchmark is noteworthy. It comes in response to the European Central Bank's's announcement in December that, from July 1, it will start publishing its euro foreign exchange reference rates at 4pm. This information will be published solely for information purposes, with use for transaction purposes "strongly discouraged".
ECB executive board member Benoît Cœuré said in December: “Given that the ECB reference rates are provided as a public good for individual citizens and institutions, it is essential to safeguard a high level of integrity and to underline that they are intended to be used solely as a reference for information rather than when making transactions.”
Although the ECB is keen for its data to be used as a reference rate for pricing purposes, it cannot impose a prohibition on the use of its reference rate for trading. But it will monitor market developments closely and will consider pushing back the time of its reference rate even further if transaction activity related to its rate does not decline substantially.
The new time for the ECB rate is also designed to discourage its use for trading. The methodology will stay the same, but by publishing the same data with a larger delay, it should be less attractive as a reference for transactions. Those using the rate for this purpose will find more timely data from an alternative provider – though of course the ECB does not endorse any one provider.
David Clark, chairman of the Wholesale Markets Brokers Association, says: “Central banks have never regarded themselves as being responsible for fixing FX rates for benchmarking purposes. Some commentators have argued it would solve a lot of problems if a central bank gave a rate, and maybe it would, but why would they want to? Ultimately the intellectual property belongs to the market and therefore it makes sense for the market to set the rate.”
Thomson Reuters hopes it will be the big beneficiary, and its new 2pm benchmark will involve it publishing the 32 rates currently covered by the ECB reference rate with a 30-minute delay. Sproehnle says: “The changes to the ECB reference rates have left a gap for corporates that need a trusted reference rate to settle cross-border transactions on a daily basis.”
Although there is no official number of transactions based on the ECB's rate, it is understood to be a substantial number. “All of those corporates will need to find an alternative service and will be looking for a trusted and established benchmark,” says Sproehnle.
Clark says: “There is certainly room for the ECB and Thomson Reuters to coexist. EUR/USD is the most liquid pair in the world. A lot of contracts will reference the ECB rate and will continue to do so. Others will be more familiar with the Thomson Reuters methodology and so will use that. Ultimately, however, users will have the choice, which is a good thing.”
Clark adds: “For the ECB, moving its fix to 4pm makes sense because that is when much FX fixing is done. It is also consistent with the outcome that central banks and market participants look for as part of benchmark reform.”
The service is primarily aimed specifically at small-to-mid-sized corporates and is available for free on the Thomson Reuters website, with paid subscribers getting access to the WM/Reuters intraday service, offering real-time data for 155 currencies against the euro, sterling and US dollar.
The WM/Reuters 2pm CET benchmark is calculated using primary market data sourced from global trading platforms such as Thomson Reuters Matching, EBS and Currenex, which Reuters says ensures accuracy and transparency. The rate is also aligned with International Organization of Securities Commissions principles for financial benchmarks.
Thomson Reuters now publishes 350 benchmarks in more than 90 countries.