Pre-hedging is a hot topic at the moment, not least because of the Mark Johnson trial and the possible ramifications of the jury’s guilty verdict, but what happens when pre-hedging goes wrong? This was one of several interesting questions raised during our Insights call on Thursday last week and is something I’d like to go into in more depth here. What do we do with price improvement as a result of pre-hedging, and more pertinently, what do we do with a loss?
I absolutely get the value in data – more importantly, I absolutely get the potential for data in our markets. However (and who didn't know that was coming?) it should not become the only driver of analysis. This week's research paper on the 4pm Benchmark Fix does a great job of empirically analysing the changes and their impact on the mechanism, but, to my mind, fails to take into account how the changes corrected an existing imbalance that needed redressing for the overall wellbeing of the market.
In this week’s podcast, Galen Stops lights the blue touchpaper and steps back to watch the fireworks by asking Colin Lambert about not only the Benchmark Fix, more specifically the research paper published this week, but last look as well following the news that a regional regulator is investigating the practice. Just to add to the mix, he also gets him going on another Lambert favourite, tracking error.
They also discuss the FX Global Code and fintechs and ask, ‘should they be adhering and signing up to the Code?’ and Lambert shares some reader feedback on this week’s opinion piece on FX options brokerage.
On Monday I called for a radical re-think around the FX industry’s use of benchmarks – and this elicited (and continues to do so) considerable feedback. Re-reading the latest class action over activities around fixes, however, made me realise this case could also end up revolving around pre-hedging – and if it does, then not only do certain industry bodies face a real challenge, but more broadly we have to discuss much more than restructuring one small piece of the market.
There was an interesting line in a report in yesterday’s Handelsblatt discussing the impending lawsuit against the banks in Europe and the US. We, along with other news organisations, reported the impending European lawsuit at the time the US papers were filed (although it did apparently come as a surprise to some outlets who reported the European case “exclusively” one week later!) but the Handelsblatt report has a quote from a source at one of the plaintiffs that I found quite insightful and potentially signals a nightmare for the banks facing the case.
Aside from what one news service decided was the headline – more like click bait – “FX Volumes Slump Globally” (guess what, yes, there was a dip from April, but on a more considered year-on-year basis FX turnover is up 8.9% at the third highest mark ever), there were actually a few interesting snippets in this week’s FX committee surveys. The two that stood out for me were the surge in RMB trading and a quite remarkable resurgence for the voice brokers in the UK.