By Chiara Albanese
LONDON--Investors are turning their back on the use of
currencies benchmarks amid a global probe into possible
manipulation of foreign-exchange markets, attendees at an industry
committee said.
At the meeting of financial-markets association ACI in London on
Wednesday, banks and investors said the volume of transactions
traded at so-called "fixes" had fallen off sharply, according to
several people who attended the event. The benchmark that is
measured from trades executed around 4 p.m. in London each weekday,
which has been at the center of a global probe that began in the
U.K. last April, is particularly falling out of favor.
"Asset managers raised concerns that volumes traded at the 4
p.m. WM/Reuters fix are dropping like a stone," said one
participant. "This is a problem for the industry because assets are
calculated against the benchmark."
The regular ACI meeting comes after a growing list of banks have
moved to suspend or fire foreign-exchange traders in connection
with the investigation conducted by various international
authorities.
ACI members include banks and investors. According to its
website, "The foreign-exchange committee works in concert with
regulators and other [committees] to promote a common global,
orderly and transparent FX [foreign exchange] market and to lobby
on regulatory issues as required."
The 4 p.m. WM/Reuters fix, calculated daily by a unit of State
Street Corp., is a snapshot of traded currencies rates used by
companies and investors as benchmark reference points. In a
statement, a spokeswoman for State Street said "the WM/Reuters
benchmark service is committed to reliability and robust
operational standards. WM continually reviews recommended
methodology and policies to ensure that industry best practices are
considered."
Before the launch of formal probes, around 1% to 2% of the $2
trillion-a-day global "spot" currencies flows were executed at this
fix, market participants said. While a relatively small slice, this
has an outsize market impact given the short period at which trades
are completed. The recent perceived drop-off in volumes is based on
anecdotal evidence rather than on measured flows, another meeting
attendee said.
"The banks are seeing less business," this person said. "It's a
realization that attempting to put through at a given moment in
time a very substantial order is not necessarily the most efficient
way of doing it. If you had to buy $100 million worth of Korean
equities, you would not do it at a split second. So why do it in
FX? There are so many better ways to do it," this person said.
Instead, the person said, some investors are choosing to pump flows
through computer programs--algorithms--that slice up large trades
and seek to complete them with minimal market impact without human
intervention.
As The Wall Street Journal reported in December, transcripts of
electronic communications between traders at different banks appear
to show efforts at collusion to try and maximize profits and
minimize losses in trading around fix points.
However meeting participants agreed, in the words of one, that
"abandoning the fix is easier said than done" as it is used as a
way for investors to benchmark the value of their foreign-currency
holdings. If they seek to match stocks benchmarks precisely, that
often demands using the same currencies yardsticks.
At various industry forums of late, market participants have
discussed possible alternatives to the way foreign-exchange
benchmarks are calculated.
One option would be to lengthening the time period over which
the benchmark is calculated to two minutes from one, to deter very
short-term trading patterns known as "jamming" and to soothe the
volatility around fix times.
"The wider the window, the more difficult it would be to
manipulate as there would be more data points. This may not make a
big difference if there is low, limited or no liquidity during
whatever time frame is chosen," said Eric Busay, portfolio manager
at California Public Employees' Retirement System in a recent
interview.
Katie Martin contributed to this article.
Write to Chiara Albanese at chiara.albanese@wsj.com
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