A group of international foreign exchange committees, including the London Foreign Exchange Joint Standing Committee, have jointly published a statement on the 21st January 2015, in which they state that they are working together to consider how best to incorporate into their best practices documentation the relevant guidance recommended in the Financial Stability Board’s Foreign Exchange Benchmarks: Final Report (FSB Report). They also strongly recommend that all foreign exchange market participants review the FSB Report and ensure that these and other best practices published by the foreign exchange committees guide the behaviour of participants in foreign exchange markets.
The Report, which references the IOSCO Principles for Financial Benchmarks Final Report issued in July 2013, lays out a series of recommendations relating to foreign exchange benchmarks, including recommendations for market behaviour around the use of such benchmarks to improve market structure and conduct worldwide. The global foreign exchange committees recognise the importance of the work that the FSB has done on this topic and are working together to consider how best to incorporate the relevant guidance recommended in the Report into their best practices documentation.
The FSB Report set out a number of recommendations for reform in the FX markets and in the benchmark rates that have been identified as pre-eminent by market participants – in particular, the WM/Reuters (WMR) 4pm London fix produced by the WM Company. These recommendations fall into the following broad categories:
- the calculation methodology of the WMR benchmark rates;
- recommendations from a review by the International Organization of Securities Commissions (IOSCO) of the WM fixes – this review is included in the report published today, and is also being published separately by IOSCO;
- the publication of reference rates by central banks;
- market infrastructure in relation to the execution of fix trades;
- the behaviour of market participants around the time of the major FX benchmarks (primarily the WMR 4pm London fix).
The work of the FSB in this area was initiated in response to concerns raised in 2013 about the integrity of FX benchmarks. These concerns stemmed particularly from the incentives for potential market malpractice linked to the structure of trading around the benchmark fixings. As a result, the FSB Plenary formed a working group to focus on FX benchmarks. The mandate of the group was to undertake analysis of the FX market structure and incentives that may promote particular types of trading activity around the benchmark fixings.
The following foreign exchange committees collaborated in the drafting of the statement:
- Australian Foreign Exchange Committee
- Canadian Foreign Exchange Committee
- ECB’s Foreign Exchange Contact Group
- Hong Kong Treasury Markets Association
- London Foreign Exchange Joint Standing Committee
- New York Foreign Exchange Committee
- Singapore Foreign Exchange Market Committee
- Tokyo Foreign Exchange Market Committee
The Financial Stability Board’s Foreign Exchange Benchmarks: Final Report is here.