FX Fixing Window Set for Widening to Reduce Propensity for Market Manipulation

The foreign Exchange benchmark fixing window is to be widened from 30 seconds to 5 minutes according to the WM Company, an Edinburgh-based subsidiary of State Street Corp. The change to the fixing window will take effect on December 14th, according to a company statement.

“This will result in the calculation window commencing 2.5 minutes before the hour or half hour and ending 2.5 minutes after the hour or half hour," said WM. The statement also said that Thomson Reuters Matching trade and order data would be added into the calculation for the euro, yen, Swiss franc and Russian rouble.

The proposed move comes on the heels of record fines for benchmark fixing amongst five globally prominent (+Barclays) banks. The investigation culminated last week in a combined $3.3 billion fine imposed in coordination by US, UK and Swiss authorities on five banks. Some of the broader issues precipitating rampant FX benchmark fixing were also raised.

"The Times They Are a-Changin'"

The widening of the window is potentially an indicator that recommendations made in September 2014 by the global regulators of the Financial Stability Board (FSB) for changes to the fixings are being implemented. Responding to widespread calls for reform to the benchmarking process, the Basel-based Financial Stability Board was tasked by the G20 to establish a set of proposals to review the benchmark. A widening of the window was among the proposals put forward by the authority in July.

In its paper, the FSB said that an extended window could "help to reduce the Volatility of prices used for the final calculation to make it harder for market participants to influence the price." In response to the proposals put forward by the FSB, WM Company said that in August it had been working closely with the regulator to enhance the transparency of the rate.

“The WM Company is committed to continuing to provide a broad range of foreign exchange benchmark rates that are reflective of the market,” the company said at the time. Other proposals, agreed after consultations with banks, asset managers and other stakeholders, include changes to trading floors that will keep the clients executed orders at a fixing rate separate from spot trading desks.

The shake up to the benchmarking process continues with various proposals being implemented. The London or "WM/Reuters" fix relates to several exchange rates and is compiled using data from actual transactions from trading systems like those run by Thomson Reuters and ICAP-owned EBS.

Propensity for Manipulation Reduction

All other proposals aside for the time being, proponents of the fixing window widening suggest that by making the window wider, the additional time either side of the fix will have the effect of reducing volatility and likelihood for manipulation. However, when looked at logically, the root of the 'fixing problem' was never insufficient time or even several order submission opportunities.

The problem was the base disregard and contempt for procedural rules and guidelines underpinned by tightly knit collusion amongst cliques. If this element remains active, the wider fixing window only widens the scope for that collusion and provides additional opportunities for flagrant traders to front-run and get the best prices. The equivalent of enlarging a sandbox where the toddlers dwell.

As benchmarking of all varieties goes digital, it will be intriguing to see how benchmarking and broader trading activity, including spot foreign exchange pricing, will adjust with the changing times.