FX benchmark probes leave buy side unconcerned

Buy-side firms remain committed to using foreign exchange benchmarks despite the growing scrutiny of the practice as numerous financial regulators have revealed in recent weeks they are investigating the alleged manipulation of benchmarks in the FX market.

The Monetary Authority of Singapore (MAS) yesterday became the latest regulator to reveal it was looking into the issue, following similar announcements by its UK, US and Swiss counterparts. "MAS has been in touch with foreign regulators on the issue of alleged manipulation in the WM/Reuters foreign exchange benchmark rates. We stand ready to assist in their investigations," the MAS told Asia Risk, FX Week's sister title.

But while the ongoing investigations will undoubtedly create friction among the major banks that are being investigated for alleged manipulation, buy-side firms say the scandal will not deter them from using fixes where appropriate.

"We tend to execute at benchmark rates when a client has the objective of minimising tracking error against a benchmark, so using that rate is very important to them," says one UK-based pension fund manager. "We certainly haven't detected any decline in clients' willingness over the past few months. We occasionally get questions about the WM/Reuters rates, but I'm not aware out of those clients that use them of anyone who has become more reluctant to do so."

Mankash Jain, head of FX at Solo Capital in London, says that although his firm's use of benchmarks is somewhat limited, they are effective when trading non-deliverable forwards (NDFs). But he is unsure how a market as liquid as FX could really be manipulated.

"To manipulate a benchmark you have to have deep pockets, which begs the question, what's your motivation for doing it? The market risk you're taking on in FX, even if it's only for a minute, greatly outweighs any potential gain you could have on the back of a fixing. We're confident in the fixing we get when we need to use it because otherwise we'd have no faith in the entire benchmark system," says Jain.

Other currency managers have expressed similar indifference to the investigations. Paul Chappell, founder and chief investment officer at C-View, argues there is inevitably a surge of volume around the time of each fix, adding that banks managing a large amount of risk face particular challenges at such times.

"It is up to the authorities to determine whether it's manipulation or whether it's because everyone is trying to do the same thing at the same time. If you went to buy $100 million in stock, you wouldn't dream of trying to execute it all at the same moment in time, but that is what the current fixing arrangements in the FX market assume," says Chappell.