(Adds dropped word "forex" to headline)
By Patrick Graham
LONDON, July 8 The world's top financial
regulator is set to issue a consultation paper to banks making
detailed proposals for changes to the way foreign exchange
"fixings" are conducted, banking sources said on Tuesday.
The sources said banks expect the Financial Stability Board
(FSB) to back the existing system of fixings but go into more
detail than previously thought on potential changes to reduce
the risk of market manipulation.
The FSB is due to report to the Group of 20 major economies
later this year on reform of a range of financial market
benchmarks and the first fruits of that have been expected for
Senior players in the foreign exchange markets had thought
it was likely to take a cautious approach on the currency
fixings, preferring to wait for the conclusion of around a dozen
regulatory investigations worldwide.
But two sources with knowledge of discussions with the FSB
told Reuters that UK-based bankers and officials, concerned at
the effect the row has had on markets which are central to
London's role as a financial centre, had exerted pressure for
faster moves to draw a line under the row.
While a number of different electronic and algorithmic
alternatives to the existing fixes have been discussed, the
sources said there was no appetite to turn away wholesale from
the existing benchmarks.
"It has become clear that clients want the fix to remain and
at this stage there will be no drastic changes to how it is
calculated," one source told Reuters.
"But there will be measures to reduce manipulation. Most of
the banks are providing some sort of input into this
conversation. The next stage is they will come out with some
sort of consultation paper. There certainly will be measures to
reduce abuse within that."
Britain's Financial Conduct Authority and the U.S.
Department of Justice opened investigations last year into
allegations that senior traders shared market-sensitive
information relevant for the London fix, which is set at 4 p.m.
London time, using actual trades.
London is the hub of the global currency market, accounting
for some 40 percent of the $5.3 trillion traded on an average
The WM/Reuters fix relates to exchange rates including the
euro, sterling, Swiss franc and yen and are 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 FSB declined to make any comment.
While there have been anecdotal indications of a dip in
volumes of trade around the 4 p.m. fix, bankers and asset
managers say that overall the fund management industry has
continued to use it.
They say asset managers are more concerned with wanting to
ensure that their currency trades are done at a rate identical
to the one by which their daily assets are valued. If rates
differ, they can register a loss or a gain that then has to be
explained to their clients.
"Some investors may reconsider their trading strategy.
However, many are still concerned with tracking error and are
still going to trade at the WM," said Klaus Paesler, head of
currency and overlay strategy at Russell Investments in London.
"It seems the situation is at a bit of an impasse. Asset
managers may want to trade away from the fix, but in many cases
are benchmark sensitive so need to keep executing at the fix to
reduce tracking error."
One source said the FSB could make a number of detailed
proposals on changes to the mechanics of how fixing orders are
lodged and dealt with to head off the potential for abuse.
As recently as a month ago, officials at a number of
financial sector bodies were saying the FSB's planned
preliminary report this summer would make only general
observations about the need for unified codes of conduct and for
benchmarks to be set in liquid markets.
The sources said on Tuesday that the consultation document
was still being written, and that details of the changes it will
propose to how orders are dealt with are still in flux.
But they pointed to discussions among some of the forex
industry's major players over methods by which orders could be
lodged direct by clients with third parties - either a fixing
matching system like that unveiled recently by brokers EBS or a
That would give the market a process by which it would be
impossible or at least difficult for the speculative community -
essentially banks' spot desks, hedge funds and the major asset
managers - to get hold of pooled fixing order information.
(Editing by Catherine Evans)