The conversation around the Fix continues apace, which is great; only by having these debates do we better understand what does, or does not, need changing, and also what good, and bad, ideas there are out there.
Over the last few days I have had plenty of contact from managers in the asset management world and most do accept that the Fix is not a great mechanism – as several pointed out to me, if it was, they would use it to execute more than the bare minimum that their mandates dictate. The very fact that most managers choose not to send flow to the Fix speaks volumes.
I want to pick up on an idea from one senior member of the buy side, someone who has been in the industry long enough to be genuinely classed as a ‘veteran’ (and I use that phrase writing this on the 75th anniversary of VE Day with the utmost respect). It is often said that the simplest ideas are the best and I must confess, being a bear of little brain, the thought hadn’t crossed my mind, but how about this?
Make the month end fixes over a longer window.
These are the days when there are generally the biggest flows and as such a longer window would account for that increase, thus reducing the market impact of the flow. Of course, being me, while accepting that is a very good idea, I can’t help but try to pull it apart, so I will guess at the reaction from those firmly attached to the current mechanism.
Firstly, they will probably say that the cost of changing the documentation, which is a regular excuse for not changing the Fix currently, would be all the more costly because it’s for only one day a month. If you’re going to change for one day, why not make it every day? After all, as was discussed in this week’s In the FICC of It podcast, the longer window outperforms on a daily basis over long periods of time and there is plenty of analysis out there that suggests the opportunity cost of using the Fix may not be worth it.
There could also be the risk that by using a different length window for month end – one that, as is likely, outperforms – that could be encouragement for some litigious party or parties start asking difficult questions over why it is not used for all windows, (although as noted, surely the defence there would be it is to reflect the larger month-end flows).
The foreign exchange industry is rightly proud of its ability to evolve and innovate, but that is not always a straight-line experience, Perhaps by testing a longer window at month-ends we can take one small step towards a different process, who knows? What we do know is that if we stand still, technology and market structure changes will continue to overtake some established mechanisms and processes and leave the industry vulnerable to more conduct risk. Lest we forget, the benchmark process was overhauled because of practices, that were once seen as standard, suddenly being seen as anything but – and it was technology, in the form of chat rooms without adequate surveillance, that played a major role in things going horribly wrong.
A few people were critical of my suggestion that we need to revisit the 2014 FX Benchmark Group’s recommendations, however I suspect they may have misunderstood my intent, which was not to criticise, but merely to highlight the changing nature of our market. A key recommendation of that group’s report was to go to the five-minute window and while I agree with those correspondents that we do not need to pull the entire process apart, I do strongly believe we ought to look at that one specific aspect.
In many ways, this is a chicken and egg situation – does it need the recommendations to be revisited before WM Company considers lengthening the window, or does that company need to cite the data, lengthen the window, and then we can change the best practice guidelines? Either way, WM and its Benchmark Oversight Committee have a role to play in this debate, for, as my correspondent with the suggestion that we lengthen at month ends notes, if WM changes only the window, the asset owners have to do very little (probably nothing), which is, I think we can agree, how they like it when it comes to foreign exchange.