What Happened at the Month-End Fix in 2022?
Posted by Colin Lambert. Last updated: January 17, 2023
The December 2022 month-end FX benchmark fix marked the completion of the first full year of publication of these fixes by The Full FX, so what did the year tell us?
It will be unsurprising to regular readers that the cumulative picture from using a longer measurement window at 4pm London time is a gloomy one for those who continue to use the shorter, WM five-minute measurement. With July the “stand-out” example, when savings across a portfolio of nine currencies could have saved investors over $1500, the cumulative savings across that portfolio in 2022 were $8,746 per million.
The data stems from that published monthly by The Full FX using analysis from Raidne using data from New Change FX, which compares the 20-minute calculation of the Siren benchmark, which finishes at 4pm, with that of the five-minute WM window, which spans 4pm.
It should be noted that these potential savings are measured assuming the execution is 100% with the general direction of the Fix, but even so, if a manager had just $100 million throughout 2022, this amounts to over $870,000 effectively given away – of course, there are funds with much more than this at stake at the month-end that are almost always with the direction of flow.
The less liquid pairs of USD/NOK and USD/SEK are the two largest potential savers from a longer window, but the data from AUD is quite stark at a cumulative saving of $11,397 per million over the year – on the aforementioned $100 million, that’s over $1 million given away.
In the majors, EUR/USD makes for potentially eye-watering savings given the amount pumped through the market at the Fix, with $8,337 per million on offer and USD/JPY offered up $7,809 per million in savings over the year.
The highest potential saving in 2022 in EUR/USD in 2022 was $1,882 per million in March, the lowest $111 in October. For USD/JPY the highest potential saving was $1,164 in April, the lowest $54 in May. At no time during the year was there a potential saving from using the five-minute calculation, the lowest saving was in Cable in October at $17 per million.
Less Correlated? Same Problem
While the numbers are nowhere near as dramatic, there is also food for thought in looking at the data through a more positive lens. Assuming the flow is only 60% correlated with the Fix – and given how the market moves during the extended window (including pre-hedging) it is fair to assume that the majority is at least 60% correlated – there are still significant savings.
Managers may be able to ignore their failure to save a few hundred dollars here and there…but when the cumulative effect heads towards $10,000 per million, surely even they realise they have to better serve their end investors?
Across 2022 the average saving per month at 60% correlation was around $145 per million, peaking at $309 per million in July and having a low of $62 per million in May. While the savings are less dramatic, it is fair to assume that more flow would be exposed to this, thus the cumulative $1,756 per million could add up. On just a $500 million portfolio the savings amount to $878,000 over the year.
This suggests that any fund that is typically with the flow – and this is largely the huge index-tracking and ETFs – is likely to find it can easily save over $1 million on its benchmark hedging over a year – and in reality the numbers could easily be 10-20 times that. For a business that is typically driven by best execution rules, and who may quibble over half a tick in non-Fix related flows, these should be eye-opening numbers. Managers may be able to ignore their failure to save a few hundred dollars per million, per month (they shouldn’t of course); but when the cumulative effect heads towards $10,000 per million, surely even they realise they have to better serve their end investors?
A regular refrain from certain sectors of the market is that is too expensive “to change the legals”, in other words the documentation and permissions around changing a benchmark. It would be interesting to know if, for example at over $8,000 per million in potential savings, how that would add up compared to the lawyers’ bills?