WM/Reuters plans to overhaul its foreign exchange fix, the pivotal financial benchmark at the centre of a global regulatory probe into allegations that traders are trying to manipulate the $5.3tn a day market.
After two decades of incremental changes to its methodology, the benchmark provider is looking at a range of more sweeping proposals including the widening of the one-minute time window in which a snapshot of transactions is being taken, two people close to the situation said. Advocates of widening the time period say it could make the rate less vulnerable to manipulation.
WM/Reuters is also deciding whether to validate its rates by comparing them with information from a rival trading platform, as it considers how to incorporate recommendations on benchmark best practices issued by international regulators, these people added.
The move comes after trading activity at the widely used WM/Reuters fix at 4pm London time has risen to centre of attention in the sprawling investigation by more than a dozen regulators around the world.
Prodded by regulators to carry out internal investigations, banks have found indications that traders used online chat rooms to share information about client orders in a bid to match up orders and align trading strategies at and around the fix, four people close to the situation have told the Financial Times.
Restoring the integrity of financial benchmarks has risen to the top of the regulatory agenda after a series of scandals ranging from the rigging of the Libor interbank lending rate to the more recent allegations of foreign exchange and precious metal price manipulation.
Run as a joint venture between State Street and Thomson Reuters, the 4pm version of the WM/Reuters fix is the benchmark of choice for many asset managers who use it to value their portfolios. Since it was started two decades ago, it has also increasingly become popular as a way to buy and sell currencies at a fixed price.
The rates are calculated by taking a snapshot of trades every second in a window from 30 seconds before until 30 seconds after the time of the fix. Roughly one in every 10 trades during that timeframe are captured and information about bids and offers are used as validation checks.
Some industry experts have long warned against trading at the fix. Professor Mark Taylor, dean of Warwick Business School, said that as things stand traders only had to move the exchange rate modestly for a small period of time to affect the fix and generate millions of dollars in profit.
He argued the window should be widened from 30 seconds either side of 4pm to 30 minutes either side. "If you broaden the window to an hour, it would be almost impossible to significantly manipulate the rate to affect the one-hour average, especially if you threw away the outliers," he said. "You take away the opportunity for people to cheat."
An alternative, he added would be to select the one-minute interval at random every day from within a one-hour slot.
An extension of the window has been discussed at various industry bodies in recent months, including at a meeting of the European Central Bank's FX contact group last October, and a meeting of the Canadian foreign exchange committee in December.
"WM supports efforts by the industry to determine best practice and we welcome discussions on these issues," a company spokesperson said and declined to comment further.
Guidelines last summer by the International Organisation of Securities Commissions, a global association of regulators, laid out responsibilities for benchmark administrators including standards for the methodologies used to calculate such price snapshots.
Iosco's chairman, Greg Medcraft, said this week that the group was beginning a review of whether benchmarks administrators are complying with the principles.
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