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 The $5.3 trillion-a-day foreign exchange market is the world's
largest and least regulated financial market and is being
investigated for collusion.
At the center of the investigations is activity around the
WM/Reuters currency fix at 4 pm local time in London, a 60-second
window at which major exchange rates are set. These prices are used
as reference rates for trillions of dollars of investment and trade
globally.
Last month the Financial Stability Board (FSB), the regulatory task
force for the Group of 20 economies (G20), proposed deep-rooted
change in a document put out to public consultation.
"We agree with and support many of the recommendations set forth in
the consultative document and believe they can produce a number of
benefits for all FX market participants," a group of trade
associations said in a letter to the FSB, which was made available
to the media on Wednesday.
The group represents 23 global banks and dealers, which account for
about 90 percent of the market.
The WM/Reuters fix is compiled using data from Thomson Reuters and
other providers, which is calculated by WM, a unit of State Street
Corp.
The FSB will present its final plans to reform the forex market to
G20 leaders at a summit in November.
ON THE DETAILS
The FSB had suggested a wider period for the fixing window, a move
the banks cautiously supported.
"While we believe the positive impact of a wider fixing window may
be limited, a marginally wider window, that is by doubling or
tripling the width of the existing window, could be beneficial in
reducing concentration of trading volume and, in certain
circumstances, volatility," the letter said.
Asset managers told Reuters earlier this week that the window could
be widened by up to 15 minutes on either side of 4 pm.
The banks backed a fixing based on a wider range of market data,
even though adding that there is "no material variability" among
sources of currency prices.
The group also supported more transparency in charges to asset
managers for transactions related to the fixing.
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"There should not, however, be a prescribed cost, markup or fee
structure on fixing transactions," the letter said.
One of the FSB's more radical ideas is the creation of a stand-alone
platform to execute transactions for setting the currency benchmark
in order to isolate the fixing from speculative traders.
The banks called for a rigorous cost-benefit analysis prior to the
development or creation of new execution facilities.
With centralized execution facilities, the role of dealers as
market-makers would be cut or scrapped and they would no longer be
absorbing risks in the market, the letter said.
A more economical alternative to a new platform could be to push
ahead with the FSB's other proposals, such as widening the fixing
window or using a different way to compile the benchmark, the banks'
letter added.
The FSB has suggested the use of so-called time-weighted average
pricing, or TWAP, based on the average price over the window, but
the banks say this approach is "not optimal" and that users may
prefer to stick with the current method.
"The implementation of these structural reforms may eliminate the
desire or need for the creation of new centralized execution
facilities," the letter said.
Thomson Reuters is the parent company of Reuters News, which is not
involved in the fixing process.
(editing by Jane Baird)
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