Banks face erosion of business around currency fix

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The dominant banks in currency trading face losing market share to independent venues as telephone-based business focused on key industry benchmarks declines in the wake of the forex market rigging scandal.

EBS, the trading venue owned by ICAP, on Monday revealed average daily volume around its own electronic currency matching service last month rose to $1.4bn from 279 deals, compared with just over $200m from 60 deals a year ago.

It was the first time the London-based venue had released figures and underlined a market trend towards computerised trading of investors’ orders around a set reference point, and away from conducting deals on the phone. The Financial Stability Board, the grouping of the world’s banking regulators, noted last week that the trend had begun in the third quarter of last year.

The growth in EBS’s volumes also show how the FX industry is beginning to explore using a centralised electronic utility, owned by a company independent of banks, for benchmark trading following a wide-ranging demand for reform from the FSB after the market-rigging scandal.

Global banks have paid more than $10bn in fines to settle allegations that traders tried to manipulate the WM/Reuters industry benchmark, a daily set window for trading. It is used to price currency derivatives contracts and as a reference point to value investment portfolios.

The FSB called for a global hub to match buy and sell orders from around the world, and reduce the likelihood that traders who conduct business over the phone can manipulate prices, but doubts remain as to its long-term success.

Companies such as EBS and State Street, have launched their own benchmark services. However, the FSB’s FX foreign exchange group, headed by Guy Debelle, assistant governor of the reserve Bank of Australia, last week noted that more needed to be done to reform the market in spite of the progress that banks had made.

Historically, fund managers would typically give banks orders to buy or sell set amounts of currency at the fix, and the banks would aggregate those orders. If they had more buy than sell orders, they would try to hedge their exposure in the market before the fix.

However, the FSB remains concerned about the residual trades that are left by a central, electronic system, according to a person familiar with the FSB’s thinking. The bank would not necessarily be able to hedge trades that could not be matched, or take the risk on to its own balance sheet.

The FSB is keen to see residual trades executed in a continuous market or sent through auction. Around 60 per cent of the orders of the EBS eFix window are filled, with the remainder currently sent back to banks. For State Street the proportion of residual trades going back to banks has risen as high as 54 per cent.

Some of the largest dealers in the market, such as Deutsche Bank, as well as industry lobby groups, have raised doubts about the scheme’s practicality, arguing a global platform would hamper competition and innovation, create risks and push up prices.

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