Changes to the way foreign exchange benchmarks are compiled have been tabled by regulators in a bid to reduce the temptation for traders to collude and cheat.
The Financial Stability Board has proposed 15 reforms in the wake of allegations of manipulation, and the launch of dozens of investigations around the world into banks.
Widening the one-minute “window” each day during which trades are used to set forex benchmarks was one of the recommendations of the FSB, which is based in Basel and advises the G20 nations. It also proposed the creation of alternative methodologies, including volume-weighted or time-weighted benchmarks, or benchmarks that are calculated over time periods of as much as 24 hours.
Allegations of market rigging by banks’ forex traders are being investigated in several jurisdictions with the Financial Conduct Authority leading in the UK. Most large international banks are being investigated and dozens of traders have been suspended, including those from Barclays and Royal Bank of Scotland.
Martin Wheatley, the chief executive of the FCA, has already said that the scandal could be as big as the Libor rigging affair of 2012 when evidence surfaced of widespread manipulation of interest rates by traders seeking to boost their bonuses.
The FSB said that the way the market was structured fostered the perception of front-running with dealers “trading ahead of the fix”.
“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.”
It is looking at reforms primarily to the 4pm fix in London produced by WM/Reuters, but also at a 2.15pm central European time fix conducted by the European Central Bank.
In both cases, a concentration of orders comes in just ahead of the fixing time as fund managers place orders to ensure the price coincides with the benchmarks they track. Many other investors, including companies and sovereign wealth funds, also adopt the practice to establish transparency of execution. The result is a large spike in trading volume, according to the FSB. That encourages bank dealers to hedge their risk by trading themselves before the fix.
The FSB working group on forex benchmarks is led by Paul Fisher, of the Bank of England, and Guy Debelle, of the Reserve Bank of Australia. Their recommendations will be presented to the G20 in Brisbane in November.
The British Bankers’ Association said: “It’s vital that we have a system that is robust and punishes any wrongdoing while being sensitive to the need to continue to attract global banks and investors to the UK.”
Forex transactions totalling about $5 trillion (£2.9 trillion) are conducted each working day with little or no regulation. Banks routinely trade both on their own account and for clients.