Adopting transparency in the FX industry
The use of FX benchmarks has steadily and significantly increased as a result of market demand for risk transparency and more precisely defined measurement. In the forex world, they have become a mainstay trading mechanism.
Even though the alternatives (WM/Refinitiv London 4 pm Fix and the Bloomberg FX Fixings (BFIX) family of benchmarks) pose significant challenges, there was no reliable alternative until recently. Some institutional investors are dissatisfied with the lack of options because they are forced to use a standard for an objective for which it was never intended. Without a doubt, there are clear disclaimers on WMR 4 pm in the notations available via a Reuters Eikon terminal stating that the rate is only for valuation purposes and should not be used to trade against. Although it has been for a long time.
What are the challenges?
The 4 pm fix has come under fire as a result of the collusion scandal involving traders from various banks. This evidence of collusion resulted in overcharging of corporate clients, costing just seven banks over $11 billion in fines. Furthermore, regulators are concerned about the hidden costs of market impact, which are harmful to investors.
In a global system, there is a lot of volume being traded, which can lead to herd effects. This means that on any given day, the majority of participants trade in the same direction. Exaggerated swings are occurring due to the way banks pre-hedge the WMR window to execute trades.
At the same time, FX arbitrageurs keep an eye out for these swings’ signals and jump in, making a relatively low-risk profit as they participate in the predictable direction, followed by the fix’s correction. Overall, investors are either paying too much or obtaining too little when buying or selling.
The general public is becoming increasingly aware of the flaws in commonly used standards. In March 2020, the European Central Bank hosted a panel discussion, expressing “serious concern” about the uncertainty surrounding fixings. For quite some time, a more equitable solution has been required.
Numerous regulatory revisions have been made in the aftermath of the last FX scandal to address a few of the existing benchmarking issues. Principle nine states that asset managers should “regularly evaluate the execution they receive,” whereas the FX global code is a voluntary ethical system.
Individuals in the foreign exchange industry must now take responsibility for obtaining the best possible rates for their clients, or risk penalties. They are addressing a cultural apathy that has traditionally resulted in people sticking to what they know rather than thinking strategically about how to get the best deal for their clients.
What are the solutions?
The majority of the concerns about issues affecting the traditional approach to currency benchmarking have been alleviated thanks to new rules and principles. They could never, however, provide a viable alternative to the traditional approach and guarantee that the end-user receives the best possible deal.
So, to provide the best possible answer to the entire industry, we launched our new benchmark option ‘in practice in the year and. Siren, the new benchmark, is a far more transparent and fair option that has been approved by the FCA benchmarking scheme.
The first live Siren trade with a major, global bank resulted in a $519 per-million savings, and savings could be even higher. The correlation to the flow of the fix determines the potential savings. To determine potential savings, a quick analysis of a fund’s proclivity to follow the market can be performed.
Savings of $40 or $50 per million are significant in this world, so when hundreds, if not thousands, of dollars, are available, the market may change.