The Financial Stability Board is canvassing views on the potential to develop a global order matching utility for fixing foreign exchange trades in an effort to clamp down on banks trading ahead of the daily benchmark rates.
The establishment of a central utility is one of a number of wide-ranging recommendations by the global regulatory body following a preliminary study into market infrastructure incentives that may encourage dealers to trade ahead of the fix in search of the best price.
The FSB analysis concentrates on the 4pm London fix, provided by the WM Company, and the euro foreign exchange rates set by the ECB at 2:15pm. The group has obtained transactional and quote data from the two main electronic trading platforms, EBS and Thomson Reuters Matching, which are used to calculate the WMR fixes. These data indicate that intraday turnover notably increases at the time of the WMR London 4pm fix and to a lesser extent around the ECB's reference rates.
The FSB believes that the market structure creates "optics of dealers 'trading ahead' of the fix even where the activity is essentially under instruction from clients.
"Worse, it can create an opportunity and an incentive for dealers to try to influence the exchange rate - allegedly including by collusion or otherwise inappropriate sharing of information - to try to ensure that the market price at the fix generates a rate which ensures a profit from the fix trading."
The FSB's interim consultation report
sets out fifteen draft recommendations for views and feedback from market participants with a particular focus on:
- the width of the calculation window;
- the need for alternative benchmark calculations (such as a volume weighted or time weighted benchmark price calculated over longer time period);
- the centring and exact timing of the fixing window;
- views on the development of a global/central utility for order-matching to facilitate fixing orders from market participants; and
- the establishment and enforcement of internal systems and controls to address potential conflicts of interest arising from managing customer order flow.
While welcoming individual market initiatives to create independent netting and execution facilities, the FSB says a central utility would have the potential to maximise netting opportunities and reduce the need to provide advance information on customer flow to a dealer. The residual trades after the netting process would then be executed or auctioned in the market during the fixing window to determine the fixing price.
The watchdog says: "The precise method of executing the residuals to achieve a clearing price will determine in part whether such a utility is feasible or not and the group is also interested in feedback on appropriate execution methods for those residual flows."
Market participants have until 12 August to respond before final recommendations are sent to G20 leaders in November.