FSB Report Shows Collective FX Benchmark Reforms Making Progress

The Financial Stability Board (FSB) has released its latest progress report on the implementation of its September 2014 recommendations for reforms to foreign exchange (FX) benchmarks, according to an FSB statement.

This FSB report was compiled from a collection of assessments from numerous market participants’ progress, having been undertaken by leading FX committees and central banks in other large FX nexuses. In particular, the report grappled one of the paramount recommendations of FX benchmarks, i.e. the reduction of incentives and opportunities for improper trading behavior by market participants around the benchmark fixes.

Indeed, the FX market has been scarred by several outbreaks of trading manipulation over the past few years, which in large part propagated changes to trading structures and benchmarks, widely seen as vulnerable to abuse. To date, the FSB’s recommendations and consequent implementation have by and large moved the market in the right direction, focusing its attention on fixing transactions and heightened scrutiny.

Despite this evolution however, progress has been convoluted, based on some assessments of the report. More specifically, the report re-emphasizes that the FSB’s recommendations are intended to apply to every FX benchmark, not just the WM/Reuters (WMR) 4pm London fix, which was the subject of a global rigging scandal. Rather, a more comprehensive implementation of the FSB’s recommendations, namely regarding other FX benchmarks, would help foster the likelihood of persevering and extending the level of improvement already seen.

The FSB report has also highlighted several key points:

• Useful steps have been taken to reform the methodology of the widely used benchmark WM/Reuters 4pm London fix, however there is latitude for further progress on reforms in this area. Additionally, several central banks have also undertaken parallel reviews of their processes for producing FX reference rates.

• Recommendations to support a more transparent customer pricing schedule for fixing transactions has seen solid implementation among the largest market participants and for the most used benchmarks, however elsewhere there is scope for further improvement.

• Work is already underway to improve market conduct practices, both within individual firms and through market-wide initiatives, through the Bank for International Settlements (BIS) Markets Committee working group on FX markets.