* Report backs reform of existing ECB and 4 p.m. London
* Signals banks should charge clients, fixing window should
* Seeks feedback on forming central system to net, execute
* Banks should beef up internal monitoring and controls
By Patrick Graham and Jamie McGeever
LONDON, July 15 The world's top financial
regulator on Tuesday urged deep-rooted change to how currency
benchmarks are set, encouraging market players to tighten up
their governance, practices and controls rather than imposing
stringent new regulation.
The proposals come in response to allegations being
investigated by regulators that dealers at major banks colluded
and manipulated key reference rates in the $5.3 trillion-a-day
market, the world's biggest and least-regulated.
At the centre of the investigations is activity around the 4
p.m. currency fix in London, a 60-second window where key
exchange rates are set. These prices are used as reference rates
for trillions of dollars of investment and trade globally.
The Financial Stability Board, based in Basel in
Switzerland, said it had no access to any evidence or knowledge
of any details of the investigations.
Its report included a request for views on a number of
recommendations, which include changes to market infrastructure,
systems and how the benchmark is calculated.
The changes that have been proposed go deeper than many in
the banking sector had expected just weeks ago. But they stop
short of calling for outright replacement of the existing fix or
any sort of direct regulation - although that could be
"We have consistently argued it is not the fix that is
broken, but rather it is the manner in which it is used by
certain market participants that must be scrutinised," said
Marshall Bailey, president of dealer association the ACI.
"In all cases in markets, ultimately it comes down to the
behaviour of individual market participants, and the ability of
their supervisors to enforce high standards."
The report said banks should change the common practice of
promising to deliver clients their currency at the "mid"
exchange rate set at a fixing. Instead, they should either
charge a clear fee or at least include a bid-offer spread
depending on whether a client is buying or selling the currency.
Bid-offer spreads are standard in all other foreign exchange
trading. They were effectively eliminated from the fixings for
the market's biggest fund and corporate clients some years ago,
as banks competed for volumes of orders.
"The group recommends that fixing transactions be priced in
a manner that is transparent and is consistent with the risk
borne in accepting such transactions," the report said.
The other major change signalled was support for a new
independent system to net off the bulk of fixing orders by
matching buy and sell orders, and execute the remainder.
Banking sources told Reuters last week that the FSB had been
considering proposals for a system that isolated fixing orders
to keep them out of the hands of speculative traders - mostly
hedge funds and spot dealing desks at major banks.
"The group supports the development of industry-led
initiatives to create independent netting and execution
facilities," it said on Tuesday. "However, it also is interested
in seeking feedback from market participants on the development
of a global/central utility for order-matching to facilitate
fixing orders from any market participants."
Industry sources have questioned whether regulators would be
able to give control of such a business to one entity.
"The unintended consequences of further concentration of FX
flows may not be what the regulators and supervisors want," the
ACI's Bailey said. "We would have to be careful in the formation
of such a utility, and ensure that all parties understood their
role and their obligations."
Until just weeks ago, senior players in foreign exchange
markets had thought the FSB's working group was likely to take a
cautious approach on the fixings, preferring to wait for the
conclusion of around a dozen regulatory investigations
But two sources with knowledge of discussions with the FSB
told Reuters last week that UK-based bankers and officials had
exerted pressure for action that would help with efforts to
quickly draw a line under the affair. They were concerned at the
effect it was having on markets that are central to London's
role as a financial centre.
Britain's Financial Conduct Authority and the U.S.
Department of Justice opened investigations last October into
allegations that senior traders shared market-sensitive
information relevant for the London fix.
London is the hub of the global currency market, accounting
for some 40 percent of the $5.3 trillion average daily volume.
The WM/Reuters fix relates to several exchange rates and is
compiled using data from Thomson Reuters and other
providers. They are calculated by WM, a unit of State Street
Corp. Thomson Reuters is the parent company of Reuters
News, which is not involved in the fixing process.
The European Central Bank also has a daily fix in Frankfurt
where the euro's benchmark rates are set.
The FSB said banks and other market participants have until
Aug. 12 to respond before final recommendations are sent to G20
leaders in November.
(Additional reporting by Anirban Nag Editing by Hugh