Fixing the Fix – final report from FSB

The Swiss based Financial Stability Board (FSB), has today published their final report and recommendations for Foreign Exchange Benchmarks, which follows an initial consultative report published in July.

The report sets out a number of recommendations for reform in the FX markets and in the benchmark rates that have been identified as pre-eminent by market participants – in particular, the WM/Reuters (WMR) 4pm London fix produced by the WM Company. These recommendations fall into the following broad categories:

  • the calculation methodology of the WMR benchmark rates;
  • recommendations from a review by the International Organization of Securities Commissions (IOSCO) of the WM fixes – this review is included in the report published today, and is also being published separately by IOSCO;
  • the publication of reference rates by central banks;
  • market infrastructure in relation to the execution of fix trades; and
  • the behavior of market participants around the time of the major FX benchmarks (primarily the WMR 4pm London fix).

Summary of recommendations

1. Fixing window be widened from its current width of one minute. WM should determine the appropriate width in consultation with market participants. The group notes that the median suggestion from market feedback was that a five minute calculation window centred on the hour for the major (trade) currencies could be appropriate. For less liquid (non-trade) currencies, the group recommends the window be wider than for the major currencies to incorporate an adequate number of observations.

2. WM should incorporate price feeds and transactions data from a broader range of sources to further increase its coverage of the FX market during the fixing window, provided it is assured that the additional sources are of sufficient quality and are representative of the market. WM should regularly assess its coverage as market structure continues to evolve. In that regard the group also proposes that in the short term, WM develop its methodology to utilise the transactional and quote information from both Thomson Reuters Matching and EBS, wherever both are available.

3. WM should expand their consultation activities to include a named user group to consider the proposed changes to the calculation methodology and to ensure it remains appropriate going forward.

4. The group supports the findings of the IOSCO review of WM and endorses the recommendations for improvement contained in that review.

5. The group considers that, where central banks publish reference rates, it is the responsibility of each to set internal procedures and they should at least take note of guidance from the IOSCO principles, especially where central bank reference rates are intended for transaction purposes.

6. The group supports the development of industry-led initiatives to create independent netting and execution facilities for transacting fix orders.

7. The group recommends that fixing transactions be priced in a manner that is transparent and is consistent with the risk borne in accepting such transactions. This may occur via applying a bid-offer spread, as is typical in FX transactions, or through a clearly communicated and documented fee structure such as a direct fee or contractually agreed price. This should occur in the context of dealers having committed to the internal process reforms and codes of behavior detailed below.

8. The group recommends that banks establish and enforce their internal guidelines and procedures for collecting and executing fixing orders including separate processes for handling such orders.

9. Market-makers should not share information with each other about their trading positions beyond that necessary for a transaction. This covers both individual trades, and their aggregate positions.

10. Market-makers should not pass on private information to clients or other counterparties that might enable those counterparties to anticipate the flows of other clients or counterparties, including around the fix.

11. More broadly, the group recommends that banks establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer flow.

12. Codes of conduct that describe best practices for trading foreign exchange should detail more precisely and explicitly the extent to which information sharing between marketmakers is or is not allowed. They also should, where appropriate, incorporate specific provisions on the execution of foreign exchange transactions including fixing orders.

13. The group recommends stronger demonstration by market participants of compliance with the codes of the various foreign exchange committees, as well as their internal codes of conduct.

14. The group recommends that index providers should review whether the foreign exchange fixes used in their calculation of indexes are fit for purpose.

15. The group recommends that asset managers, including those passively tracking an index, should conduct appropriate due diligence around their foreign exchange execution and be able to demonstrate that to their own clients if requested. Asset managers should also reflect the importance of selecting a reference rate that is consistent with the relevant use of that rate as they conduct such due diligence. Based on discussions with the relevant market sectors, the group believes that all the recommendations above can and will be accepted and implemented by the market groups concerned. This should deliver a substantial improvement in market structure and conduct. But investigations into alleged misconduct are ongoing across a range of markets, and it is possible that the authorities will ultimately conclude that regulatory change is needed to promote or ensure appropriate behaviours and/or to implement the recommendations of this report.

The full report is available here.


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