By Dow Jones Business News,
January 23, 2014, 09:31:00 AM EDT
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
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
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 email@example.com
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