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FX benchmarks to seek IOSCO’s blessing

On 15 July, the FSB’s Foreign Exchange Benchmark Group published an interim report on FX benchmarks.  Responses should be sent by 12 August.

The report focuses on the two pre-eminent FX benchmarks: the World Markets Co/Reuters (WMR) 4pm London fix and the euro foreign exchanges rates set by the European Central Bank (ECB). WMR publishes spot fix rates on 160 currencies, forward rates for 82 currencies and non-deliverable forward rates for 12.  ECB publishes 32 euro foreign exchange reference rates (mid-rate) for 32 different currencies.  The FX benchmarks are generally based on actual trades.

The group is particularly seeking feedback on the following recommendations:

On the calculation methodology:

  • Widening fixing windows, from the current width of one minute
  • Developing alternative benchmark calculations, based on longer periods of up to 24 hours
  • Fixing windows to close or start on the hour, from the current half-hour setting

On the FX market infrastructure:

  • Supporting the development of industry-led initiative to create independent netting and execution facilities, or the development of a global/central utility for order matching

On the behaviour of market participants:

  • Suggesting that banks establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer flow, in line with codes of conduct developed internally or by foreign exchange committees

Although central banks fall outside the scope of IOSCO principles , the group makes a point of encouraging central banks’ compliance if the reference rates are intended for transaction purposes. There could not be a more vivid illustration of mistrust.

The initiative of the group to actively involve IOSCO in their review is likely to increase the pressure on the other benchmarks to follow these international principles. In particular, the post-Wheatley LIBOR would not be aligned with IOSCO’s principles.

IOSCO principles go above and beyond what is actually required by the FCA for LIBOR. Reporting of sensitive information on the deals conducted has been reported to cause tensions between the administrator (IBA) and the submitters.

The group indicates that the final report on FX benchmarks will be published on time for the Brisbane G20 Leaders Summit on 15 and 16 November, along with IOSCO’s findings and recommendations in respect of the WMR 4pm fix.

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