Any group’s reputation is dependent upon
its weakest link and as such the foreign exchange industry could be treading on
thin ice thanks to the apparent actions of one such “weak link”.

Sadly, we are back on the subject of
benchmark fixings, more specifically news that reaches me from multiple
sources, that one provider is (pause for resigned sigh), allegedly offering
mid-rate execution with no fee.

Although one source tried to put the news
in a positive light by pointing out it was not for the WMR fix, I did point out
that the recommendations put forward a couple of years ago are targeted at all FX benchmark fixings – and those
recommendations state (as does the Global Code of Conduct) that
fixing trades should be priced “in a manner
that is transparent and is consistent with the risk borne in accepting such

This time, I am told,
the fix in question is the 1pm Bloomberg fix, to which several customers have
gyrated following the European Central Bank making it explicitly clear it did
not want people using its reference rate fixing for trading purposes. My
sources allege that “at least one” provider is processing transactions related
to this fix at mid-rate and not charging a fee – in direct contravention of the
principles set out on benchmark execution.

First things first and
before I go any further I need to stress that the problem I have with this
behaviour has nothing to do with the fixing provider – just as was the case
with the original fix scandal, Bloomberg, like WM Company, is not at fault

My problem lies with
the direct provider of the execution services and, if I may be a little
controversial, with the clients that are apparently not only willing
accomplices to this contravention of the principles, but are proudly telling
their other providers what is going on with the less than subtle implied
message “if you want my fixing business you should do the same”.

Even if there is a miscommunication
somewhere and the provider is charging in a new and different fashion, I still
feel we, as an industry, should be concerned by the actions of the customers in
apparently encouraging a return to practices that caused so much angst (and
financial cost).

I have, of course,
been thinking about how and why the provider would do such a thing – after all
I think we all know how it ends up when you put a dealing business in a
difficult position, holding risk it cannot exit without incurring a loss!

One factor is that
unlike other fixes, the Bloomberg offering is “free”. I use inverted commas
there because obviously there is a reasonably hefty charge for using a terminal
but, equally obviously, it is used for a lot more than just fixings, therefore
the incremental cost per fix is very small.

Aside from that what
really tweaks my interest is that just about every provider I know of offers
benchmark execution via an agency model – does this mean agency execution is
being given away for free? It would, I suppose be an inevitable outcome of so
much competition.

Some may argue that
with no brokerage paid by the provider and an already functioning algo on hand
there is minimal or no cost, therefore pricing can be set at zero, but I would
disagree. As I have already noted, there is a small cost to be allocated in having
a terminal in the first place, then there is the cost of the person (people)
ensuring the algos are running well and are fit for purpose in an ever-changing
market environment.

Throw in the cost of
trading on various third party venues – I find it hard to credit that all of
the fix volume would be executed on one venue – and there are some real costs
to handling this business, as recognised by the FX Benchmarks Report from the

Of course the other
probability is, in my eyes, even less palatable – the provider is doing all of
this as a principle. If that is the case then they probably are making money
out of the flow and as such are, as I noted at the top, treading on very thin
ice. They could be internalising the flow and making money that way, but is
that really the way to offer benchmark execution? It effectively says, “here’s
your benchmark, even though we can do much better”, which is perhaps contrary
to the Global Code of Conduct which states, “[market participants] should provide
all relevant disclosures and information to a Client before negotiating a
Client order, ?thereby allowing the Client to make an informed decision as to
whether to transact or not.”

If a provider is
telling a client they can execute their order better, should the client’s best
execution policy and fiduciary duty to its clients not dictate they alter how
they transact?

The interesting thing
from my perspective is that the Bloomberg fixes are calculated using indicative
pricing data as well as actual trades, so has a provider worked out there are
ways to nick points here and there due to some data being different to actual
trades? Again, my point above about fully informing the client stands – and
that is what this is really about. Under the ‘transparency of action’ ethos of
the Code of Conduct the client should be informed why the provider is not
charging them – and should take action appropriately. To quote the benchmark
recommendations, “Index providers should review whether the foreign exchange
fixes used in their calculation of indexes are fit for purpose.”

It adds in the next
recommendation, “Asset managers, including those passively tracking an index,
should conduct appropriate due diligence around their foreign exchange
execution and be able to demonstrate that to their own clients if requested.
Asset managers should also reflect the importance of selecting a reference rate
that is consistent with the relevant use of that rate as they conduct such due

In the Code of Conduct
there is plenty about how clients’ interests should be looked after and how
staff should “seek advice where appropriate” and “report/escalate concerns”
when they have them. Something I hadn’t considered before but notice isn’t
covered (and perhaps it should given the experience around fixings) is firms’
requirement not to put their staff in harm’s way by conducting business in the
fashion described above. This apparent decision to provide fixings at mid-rate
for no fee, has been taken by someone in a senior position and has been tacitly
endorsed by someone senior at the client firm.

In the interests of
their staff, their firms and the industry as a whole, I can only implore them
to think again. Yes, you probably can provide the service at a lower cost that
was set in the immediate aftermath of the recommendations, but zero? I don’t
think so.

Something, somewhere,
is going wrong – and we need it fixed (no pun intended) before something bad

Twitter @lamboPnL


Colin Lambert

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