Want Change at the Fix? You May Have to Wait
Posted by Colin Lambert. Last updated: September 8, 2022
Following a request for feedback initiative in April, which the firm says is still open on its website, Refinitiv Benchmarks Services (RBSL), has provided an update of the responses it received with the firm saying a majority of respondents were happy with the current five-minute window, saying it was “about right”.
The London 4pm Fix in particular has been in the spotlight thanks to large moves leading up to, and during, the five-minute calculation window, however RBSL says feedback was that the current arrangement “provided sufficient time for market awareness, calculation of a benchmark and execution – largely driven by the increased depth of liquidity and netting opportunities.”
In what has been a regular refrain from asset manager users of the Fix, RBSL says this feedback was coupled with “a concern that a longer window could lead to greater tracking errors”.
Although reform may not be on the cards with such headline feedback, it is noticeable that approximately one-third of respondents consider the window to be too short. RBSL says there were concerns raised about the increased FX flow during the time of the window, particularly at key times such as month/quarter end together with the related concern that this results in higher risk and market movements. “It was suggested that increasing the length of the window would enable more price discovery and opportunities for matching flow,” it states.
Unsurprisingly, there was “clear consensus” that having two different mechanisms – either for month-end fixes or every individual fix – would not work due to the risk of confusion different windows could bring. “Nearly all of those that responded to the question, confirmed that the operational requirements and expectations from a benchmark are the same on all days,” RBSL says in the statement.
The Full FX View
Surprised? Me neither. It was always a longshot that such a reactive community as users of the Fix would push for change, hence why this publication has called for Refinitiv to take a leadership role and push through what remains, in my view, a necessary change.
One-third is a significant minority pushing for change, however and I suspect the identity of those making this argument will decide whether changes are made. If they are influential – in that they truly understand what is happening and are concerned about it – then maybe something will happen.
It is sad to hear the same old tired argument of “tracking error” being rolled out again, and to me this demonstrates a certain segment of respondents’ ignorance or laziness. A longer window would still provide a benchmark rate that all managers would use, if this is the rate they are rolling their hedges with, where would the tracking error be? While there could, possibly, be an argument that the longer window may clash with some of their flow and create small tracking error, the reality is that a longer window would merely capture the current pre-hedging activity.
I am afraid this highlights the reactionary nature of Fix users, they do not want to consider anything that may, and I stress ‘may’, need a change in workflow. I am not sure, beyond cut-off times, how much would change, however – the channels would be the same. It’s like the “legals” argument – users say changing the legal documentation would involve too much work – but the paper would still reference the WM Fix, just as it does now.
The responses merely confirm that a certain segment of our industry has its collective head in the sand. The Fix needs reforming, it needs a longer window – just ask any algo team at a bank, their analysis highlights the need to execute over a longer period of time to avoid excessive market impact in the five-minute window itself.
If nothing happens, end investors will continue to haemorrhage unnecessarily as speculators take advantage of the information leakage and almost guaranteed market impact from the order flow. The risks for the industry will also increase, because banks are still (necessarily) trading ahead of the calculation window, those users of the Fix may also find themselves in the legal crosshairs – and will, predictably, seek out scapegoats and push for change they could have prompted had they been diligent and open to change.
The good news if nothing changes, is that the industry does have an alternative mechanism in Raidne’s Siren, something that didn’t exist the last time there was WM reform. Yes, the “legals” will be irritating, but the better outcomes for end-investors – which is what we should all be concerned about – will more than make up for that.
Change will come in this space – the question RBSL wants to ask itself is does it want to lead the change, or react when it is probably too late?
RBSL also sought views on the potential for market impact around the 4pm Fix, however it says that approximately half of respondents declined to offer comment. “For those who expressed concern, this focussed on the potential that demand may skew the FX execution price received and the potential impact of hedging moving the market,” the firm says in the statement. “Those who did not express concern advised that the market concentration and increased liquidity enables their execution; it allows a consistent rate to be used with their investment mandates, they perform their due diligence and make an informed choice.”
There was also good support, RBSL says, for introducing additional data sources, with a number of suggestions received, this is unsurprisingly given the dwindling volumes on the primary FX CLOBs in recent years.
“As WMR has evolved over the years, it has always been with users at the centre of these changes to help make sure that any change is the right change and will produce positive and expected outcomes for all our users,” RBSL states. “The feedback has provided insight into users’ views and requirements and raised several practical considerations when regarding potential enhancements of the WMR methodology.
“Responses provided in this “Request for Feedback” help inform us of what is important and will be used as an input to the broader review and analysis which is currently in progress to identify and define further development areas for WMR,” it adds. “More information will follow in due course.”