The Last Look…
Last Friday – a month-end ironically – marked the closing of the Refinitiv consultation on revising the WM Fix and I hope, but do not expect if I am being honest, that the industry responded appropriately.
There are two likely outcomes from the consultation – nothing changes or Refinitiv Benchmarks establishes a leadership position and starts a process of change. Obviously I have no idea of what the responses are (I have, however, dispensed with my usual ‘glass half-full’ outlook) but let’s look at what the outcomes could be depending upon the results of the survey.
If the responses encourage Refinitiv Benchmarks to make changes to how the Fix is conducted that should be a positive for the industry and the firm itself. Users of the Fix will not have to “change their legals” or their processes, merely, if a longer window is selected for example, the rate they receive will be calculated differently.
Importantly, from my viewpoint, such a rate would be calculated over a more realistic timeframe. Data show that passive assets under management have grown substantially since the changes were last made to WMR in 2016, therefore while the five-minute window may have been appropriate back then (sorry, should still have been 10 minutes!), the sheer volume of business now being “referenced” (for which, read “traded”) at the Fix, argues for a longer period to reduce market impact.
It was interesting to note a story on Reuters last week, in which an interviewee cited flows at the Fix as having a larger impact on the level of the euro than usual. This, allied to suggestions in the industry that the average volume through the Fix window is now anything up to 17 times the average, should tell us those five minutes are becoming inordinately important and are starting to dominate the FX trading day. I don’t think this is what anyone, least of all Refinitiv Benchmarks, expected, or, in some cases, wanted. I don’t see how it is healthy that such a large percentage of daily spot volume is traded in such a short window.
Talking to people in the industry about the survey, what did surprise me was the number who thought the methodology could be altered to more accurately reflect what happens in the five minutes. Historically, this has not garnered much attention – it was the Fix, it was calculated in a transparent fashion, and therefore all was good. Now though, some people are suggesting that the degree to which the algos are beating the Fix, as well as the need to calculate all through the window, even if the first 151 prints are the same, are in need to review.
Across the full portfolio of nine currency pairs the average saving over that one year was $759.25, those are serious potential savings on trades that are in the billions of dollars.
The hope is, assuming Refinitiv does back change, is that alterations are not made to meet current needs. This needs to be a forward-looking process because whatever the issues with the Fix today, it seems pretty certain they will be exacerbated as time progresses – the Fix could become a real victim of its success.
So what happens if, as I gloomily predict, the response is a big “meh”?
First of all, we should not be surprised by such a response – as I have noted previously, the only people really suffering from all that goes on at the Fix are the end investors – and as someone sagely observed recently when discussing this aspect, “who speaks for them?” The answer should be, of course, the trustees or other oversight, but if they don’t understand what remains to many an administrative trade, how do investors realise and react to the fact they are potentially losing a lot of money on poor FX hedging?
If nothing happens, however, I suspect that the funds are running a legal risk. The evidence is there that executing over a longer window offers better outcomes for investors – The Full FX has been running a comparison of the five-minute WMR and 20-minute Siren fixes for 12 months now (to end-March) and the average savings in EUR/USD over that time from the longer window are $794.50 per million (at 100% correlation to the fixing flows).
Will Refinitiv look back and see this consultation as a missed opportunity?
Looking at the other “majors”, USD/JPY average savings are $720.75 per million; Cable is $847.17 per million; and USD/CHF is $641.17 – coincidentally the lowest possible saving across the nine currencies pairs surveyed monthly. Across the full portfolio of nine currency pairs the average saving over that one year was $759.25. Those are serious potential savings on trades that are in the billions of dollars. Some funds could be looking at potential costs in excess of $100 million per year.
This data is in the public domain, as are studies that have used deeper datasets to highlight the market impact of trading in a five-minute window – this consultation was the opportunity for users to say “perhaps we need to look at a longer window”. If they didn’t, it could be argued they are wilfully ignoring the data and with that comes legal risk.
Equally, if nothing changes, what does this say about Refinitiv Benchmarks? The firm should, as I noted recently, be praised for engaging in this consultation, but if it too decides to continue ignoring the data because its buy-side clients can’t be bothered to embrace change, what does this say about its culture?
It is seven years since the study was published by the FSB recommending changes to the Fix, but in that time a lot has happened in the industry, not least technological innovation, the rise of data analytics and continued fragmentation.
Perhaps, Refinitiv Benchmarks should seek to grab a grain of demand for change out of the report and lead the way? I understand that the Fix is a vitally important aspect of the market – the data highlights that – and its importance is growing by the year. This increased importance should bring a more flexible and open attitude to change – as I have stated before, if everyone listened to their customers en masse there would be no technological innovation. What is needed is to pick out a minority – firms that actually study this stuff – and heed their feedback.
There is also the danger for Refinitiv Benchmarks that this becomes the straw that breaks the camel’s back. Other benchmarks are available and those more progressive funds may start to look elsewhere. If this then births a groundswell of change amongst asset managers (who are, as we all know, terrified of tracking error) will Refinitiv look back and see this consultation as a missed opportunity? Will it find that it has to do something it (quite rightly it should be noted) is averse to, and react quickly and urgently to a changing dynamic?
Far better, surely, that the firm prepares for change and enacts it according to a timeline established by itself, rather than driven by industry events? Of course, that requires it to be brave and lead the change, be proactive rather than reactive. This may not be a bad thing for the firm, because I would suggest that just as too many firms are lazy in engaging with new ideas around the Fix, they will be equally “meh” about any changes that are made.
Changing now could be painless – I am not sure the same could be said in even one year’s time.