The global regulators published details of its preparations to fix foreign-exchange benchmarks in response to assertions that traders are in conspiracy to manipulate rates in the $5.3 trillion-a-day currency market.

The Financial Stability Board (FSB) suggested making changes to how the most popular rates from WM/Reuters are being calculated by expanding the length of the one-minute windows in which the benchmark is primarily based. Switzerland-based Basel were among the first ton set its deadline set in the 12th of August upon commenting on the plan.

There are tacit benefits to having a broader window such as more data points would be made available to help fix the rate which are likewise much harder to manipulate. With at least a dozen regulators among three primary continents are investigating whether traders in the world’s biggest financial market having allegedly acted in conspiracy with counterparts at other companies in manipulating benchmarks which are used by money managers in determining the payment for foreign countries. Furthermore, more than 25 traders in total have been fired or suspended across the industry.

Manipulated benchmarks

The excitement and temptation to manipulate financial benchmarks is within the premise of sporting events. The challenge for those who are contemplating to create a benchmark is to ease on the temptation by making the benchmark inherently resistant to the said exploitation.

The plans were among the 15 proposals suggested by the group to transform rate setting and consequently boosting contingencies against fraud and manipulation. The plans were spearheaded by the Prudential Regulation Authority at the Bank of England and the Reserve Bank of Australia. However, the aforementioned firms stopped short of proposing guidelines for central banks that publish reference rates indicating that it is the sole responsibility of each to set internal measures.

The FX Markets
Regulators should generally be focusing on people who exploit the system instead than changing the rate-setting process.

It basically is the matter in which it is utilised be definite market participants that must be examine which simply boils down to the behaviour of individual market participants along with the ability of their respective supervisors in implementing high standards through valuable oversight and proper supervision.

The FSB generally involve regulators and central bankers from across the world that aims to balance global financial rules. The board which reports to the group of 20 nations recently set-up a task force to make repairs to the injured benchmarks in the aftermath of the London Interbank offered rate (Libor). Moreover, it would be providing for an extension into currency-market benchmarks.

Current Trading volumes

The benchmarks are primarily based on trades in a minute-long period which is mostly used. There is a concentration of trading by dealers during the calculation period and although trading volumes are on the rise shortly ahead of the fixing period, this minimum position created optics for dealers who were trading ahead of the fix despite the managed risks in relation to their respective client orders.

The worst part is, it could create an opportunity and an incentive for those dealers to exploit the market in order to make it more likely that the same market price can be seen at the fixed generated rates which will consequently result in profit from their fixed trade.

Traders once used chat rooms to share information regarding their client’s position with counterparts at other financial institutions and agreed to push trades though altogether during the fix in order to maximise their impact in the simulated benchmark.

The Bank of England said that it is presently reviewing allegation that its officials overlooked sharing client information going into the fix as it could potentially reduce volatility.

Sensitivity of time

The FSB is now imploring views on whether the fix should begin or end exactly on the contemplated hour than be centred around it and whether the time should be moved from the usual 4 PM spot.

Market-making dealers should generally be cautious of which times of days are most likely to be disrupted by news release and clients should be further advised not to use such fixed rates at those times or when vital data is due.

The FSB is also contemplating in seeking feedback from market participants on the development of the global/central utility for order matching in order to supervise fixing orders from any market participants later on.

With such attention to facilitate a well governed and capitalised plan, the risks are better understood. However, the unintended consequences of any additional concentration of FX flows may not be what regulators and supervisors have in mind.

Last Updated: August 15th, 2014