The Last Look…
Posted by Colin Lambert. Last updated: April 11, 2022
Refinitiv Benchmarks is to be applauded for releasing a public survey on possible reform of the WMR Benchmark Fix, for too long the sense has been until the buy side starts complaining loudly about their execution quality (which few of them probably monitor around the Fix), nothing would be done.
It is to the firm’s credit that it is acknowledging, as it has obliquely in the past it has to be said, that the benchmark, used by so many for the FX execution, could be in need of refreshing. Of course, few of you are going to be surprised to hear me push for benchmark reform, to me the data that The Full FX has been publishing for a year now tells us all we need to know – there is significant market impact from fixing flows that can be mitigated.
Equally, the way things work at the moment, the end investor is paying through the nose for execution at the Fix; and the banks are making money from the pre-hedging, but only because in many cases, the customer will not accept an improvement. The people making the real money in the current circumstances are the speculators, who have nothing to do with the Fix at all, indeed through their (perfectly legal) actions, they are exacerbating the market impact. In these circumstances, I struggle to see how the current framework is good for the people everyone purports to care about the most – the end investor.
I have been writing and talking about whispers in the US (where else?) over potential legal actions against managers blindly using the Fix, so maybe that has also prompted the public consultation – you never know, the relentless data from these very pages might have played a role – but either way, the key now is for people with an interest in the Fix to respond. The worst outcome of all from this survey, in my opinion, would be a limited response, because this would confirm what many suspect – too many managers, asset owners or trustees simply don’t care, or understand, how their FX hedging takes place.
I have no doubt that we will hear the usual wailing and experience the wringing of hands from certain quarters over the potential cost of changing “the legals”, but this is about more than that. If, and it’s a big ‘if’, Refinitiv changes how it calculates to reduce market impact, then no one has to change a thing (and I still can’t believe how much people think it will cost to change documents from saying “the WMR benchmark” to “a properly regulated benchmark”).
The hope is that as many institutions and individuals respond to this survey openly and rationally – not just with the survey equivalent of “it’s all fine”. It isn’t, the market impact on too many occasions highlights that.
My sense from the questions being asked by Refinitiv is that the firm is open to a wide review of how it calculates and publishes, including what remains a radical idea for many of publishing two benchmarks based upon different calculation windows, and a longer window for month-end. The latter is an idea that has been put to me several times by people over the past year and, given the excess flows seen at those times, it would make perfect sense.
The hope, therefore, is that as many institutions and individuals involved with the Fix respond to this survey openly and rationally – not just with the survey equivalent of “it’s all fine”. It isn’t, the market impact on too many occasions highlights that. The attitude of the banks will be interesting – generally speaking my feedback from talking to bankers is that they make decent money out of the Fix, but are very nervous about how much. A pre-hedging programme that creates (unintended) excess market impact is potentially damaging to their reputation and throws the spotlight upon how much money is being left on the table by the managers, and with the banks.
Most banks use their algo teams to execute fixing flow and the pre-trade analysis tells them the length of the execution to minimise, but not remove, market impact, and execute according to that plan. It is a data-driven decision, within the rules, and not aimed at maximising P&L.
The problem is that if they make excessive money, and try to give an improvement to the clients, as I noted earlier, it is often refused. So, we have a situation where some participants are making money in a fashion with which they are uncomfortable, other participants simply don’t care how their flow is executed, and a third group ignorant of what is going on.
In these circumstances I believe, as I have for a long time now, it is time for Refinitiv Benchmarks to show some leadership and change the window. This survey is, hopefully, the start of that process – I just hope inertia, hubris and indolence don’t derail the project.