The Royal Bank of Scotland (RBS) has become the latest financial institution to offer customers a benchmark currency fixing service. RBS FiX is intended to provide a snapshot of the market price at 11 fixed points throughout the trading day in each major trading zone in 61 currency pairs. The benchmark prices will be published on Bloomberg, MoneyLine Telerate and Reuters (as well as other unnamed information sources) shortly after each fixing, according to RBS.
The new product is the first currency benchmark to be based upon EBS benchmarks, an algorithm created by EBS to reflect market depth on both the bid and offer on EBS’s spot dealing system. The algorithm produces a single fixing price, as opposed to a spread, in the major EBS currency pairs: Eur/Usd, Usd/Jpy, Eur/Jpy, Usd/Chf and Eur/Chf. RBS says that it is accessing fixing prices in the currency pairs not covered by the agreement with EBS from other independent sources, although it declined to be more specific.
The provision of EBS benchmarks to RBS is the first public step in EBS’s plan to make greater use of what it believes to be its competitive advantage both in liquidity and data services in these currency pairs, as revealed by EBS CEO Jack Jeffery in Profit & Loss last year (July/August 2002).
Both companies stress that the data provision is not exclusive to RBS and that EBS retains the right to use the rates in other ways, including other benchmark products produced in collaboration with customers or third parties.
RBS says that Deloitte and Touche are conducting a review of the RBS FiX process in accordance with the guidance issued by the AICPA in SAS number 70.
“EBS’s unique methodology incorporates key market depth information into its benchmark product and the rate generated reflects the liquidity available on both the bid and offer,” says Jonathan Quin, who joined RBS from Citibank (which also has a benchmark product) last year as head of e-commerce business development. “Using EBS benchmarks to power our proprietary currency fixings has resulted in a powerful new benchmark product.”
The key advance in this latest fixing product is that typically the data that has driven benchmark fixes has been available to the interbank market only. The release of RBS FiX enables the buy side to benefit from the same level of data. Benchmark fixings are becoming increasingly popular with many on the buy side who see them as a means of proving best execution. Indeed the European Central Bank in its latest review of the FX market structure notes that they are increasingly being used by a wide range of buy side institutions. It also highlights why the use of EBS data could be a key differentiator for RBS and its new product by stating, “Some market participants felt that reference rates are so important that they would like to see an independent source of good quality reference rates.”
There are murmurings on the buy side, however, that fixings are not as efficient as they could be. Several buy side participants have alleged that they believe the information can be released to the bank dealers too early, thereby enabling the dealer to act upon what will be his net position ahead of the fix. Although these critics acknowledge that it negates the need for checking prices with a number of institutions, they see an increasing demand for a ‘fix around the fix’. This would involve calculating an average price over a certain period of time either side of a designated point.
Notwithstanding such concerns, RBS has also created an online trading product that allows clients to deal on the fix prices at pre-agreed spreads. RBS says this gives the clients full price transparency and an efficient method of transacting multiple deals simultaneously. It adds that clients can upload transactions to be dealt at any fixing in the future and can download completed deals directly into their systems or spreadsheets. An automated programming interface (API) is also available for automated trading, booking and processing of high volume trades, according to the bank.
“Increasingly, multinational treasuries are centralising their dealing operations to reduce cost,” says Martin Spurr, head of eVentures at RBS. “In these circumstances, the dealing system developed by RBS can be used to aggregate, net and control subsidiary flows; an ideal solution where deal amounts are too small to justify individual manual dealing. Through the system, clients can reduce the manual costs of FX transaction, confirmation and settlement, increase price transparency and advantage of straight-through processing efficiencies.”