Investors Shun Currency Benchmark Amid Forex Probe Volumes on London Benchmark Are ‘Dropping Like a Stone’

Investors Shun Currency Benchmark Amid Forex Probe

Volumes on London Benchmark Are ‘Dropping Like a Stone’

CHIARA ALBANESE

Updated Jan. 23, 2014 3:47 p.m. ET

Investors are shunning the main benchmark for global currencies amid a widespread probe into possible manipulation of foreign-exchange markets, according to several people who attended a high-level committee of currency-market participants that met in London this week.

Trading volumes at the 4 p.m. WM/Reuters fix “are dropping like a stone,” said one participant at the foreign-exchange committee of financial-markets association ACI on Wednesday.

The WM/Reuters fix is calculated daily by a unit of State Street Corp. from trades executed either side of 4 p.m. London time. The fix provides a snapshot of currency rates and is used by companies and major institutional investors as a reference point for valuing foreign-currency-denominated assets and liabilities.

“The WM/Reuters benchmark service is committed to reliability and robust operational standards,” a State Street spokeswoman said. “WM continually reviews recommended methodology and policies to ensure that industry best practices are considered.”

Recently, the fix has also become a key focus of authorities looking into potential manipulation of global currency markets, according to people familiar with the investigations.

The U.K.’s Financial Conduct Authority kick-started the global probe into possible currency-market manipulation last April. Since then, regulators in Europe, Asia and the U.S. have also launched investigations, and several major currency-dealing banks have suspended traders in connection with the probe.

As The Wall Street Journal reported in December, transcripts of electronic communications between traders at different banks appear to show efforts at collusion to try to maximize profits and minimize losses in trading around fix points.

Before the global currency-market investigation, around 1% to 2% of the $2 trillion-a-day global “spot” currencies flows were executed at the London fix, according to market participants. These trades, while a relatively small slice of the overall currency market, have an outsize impact, given they are completed over a relatively short window.

The ACI’s foreign-exchange committee meets several times a year and membership consists of major investors and currency-dealing banks. One person who attended this week’s meeting said banks that trade at the fix for their clients are seeing less of that kind of business. “It’s a realization that attempting to put through at a given moment in time a very substantial order is not necessarily the most efficient way of doing it. If you had to buy $100 million worth of Korean equities, you would not do it at a split second. So why do it in foreign exchange?” this person said.

The ACI discussion comes after bankers at various high-level industry forums have considered the impact of the currency-market investigation on the way foreign-exchange trades are executed. Representatives of several large global banks said at a meeting in November of the Foreign Exchange Committee of the Federal Reserve Bank of New York that industry best practices would be altered as a result of the probe, according to minutes of the meeting.

In October, bankers and policy makers at a meeting of the European Central Bank considered changing the way foreign-exchange benchmarks are calculated, or pushing clients to ditch benchmark-based trades altogether, according to a person who attended the meeting.

Some fund managers are also expressing concerns about trading at the fix.

“Asset managers have got to do what they have to do, and they can either use the fix or avoid it. Studies have shown that there is more liquidity around the fix, but volatility also tends to be higher,” said Eric Busay, portfolio manager at California Public Employees’ Retirement System, which has about $283.8 billion of assets. “We have always been concerned about anomalous moves in the price around the fix, and we’ve always been very cautious in the use we make.”

Robert Savage, a hedge-fund manager who plans to launch currency fund CCtrack Solutions in coming weeks, said “publicity over the fix has made managers realize that their obligation for best execution isn’t solved by getting a public price at a particular time.” His new fund won’t be using the WM/Reuters fix, Mr. Savage said.