Only months into an overhaul of financial benchmarks at the centre of market manipulation allegations, traders and investors have raised concerns over whether new rules will work and big banks will have too much influence.
Global regulators started to map out rules aimed at making hundreds of financial benchmarks, from interbank lending to commodities, more transparent and more inclusive after the Libor interest rate-rigging scandal broke in 2012.
In the $5 trillion-a-day currency market, regulators plan to extend the one-minute window used to set benchmarks to five minutes in an attempt to make it harder to manipulate prices.
The regulators have ruined it and the people they are trying to protect and make it better for, they have made it worse for them
But some traders and investors say the additional exposure, risks and costs associated with the longer window will lead to smaller banks withdrawing from the “fixing” process, leaving a few big banks setting the reference prices.
Similar concerns have been raised in the precious metals markets, where some reform has already taken place. Some market participants say the steep cost of satisfying extra layers of compliance could squeeze out smaller players.
The overhaul in bullion markets has so far spawned an electronic pricing mechanism for silver prices, ending a century-old manual process. But customers of participating banks complain they now do not have the ability to change their order during the process because the technology does not allow it, for now.
“I used to use the fix all the time and I don’t use it any more under the new rules,” one large commodity fund manager said, speaking on condition of anonymity about the new silver fixing as they are not authorised to speak publicly.
“I can place an order 30 seconds before the benchmark price starts but once the process starts, I can’t cancel it, I can’t change it, I can’t add to it.”
“The regulators have ruined it and the people they are trying to protect and make it better for, they have made it worse for them,” said the manager, who has resorted instead to trading using spot market prices. Global regulator the Financial Stability Board (FSB) declined to comment.
British regulator the Financial Conduct Authority said the shape of the reforms for various benchmarks – including for currency markets and commodities – had been led by the market, with banks and other industry players involved in the process.
The row over benchmarks used to set values for thousands of contracts and assets worldwide began in 2008 with the first allegations that banks manipulated wholesale Libor rates, the London interbank offered rate that is used as a reference point for pricing roughly $450 trillion of financial contracts, from derivatives to credit-card loans.
After regulators started slapping billions of dollars worth of fines on banks for their roles in the scandal in 2012, and prosecutors started charging individuals, Britain announced in September it would extend laws criminalising the rigging of Libor to seven other benchmarks by the end of the year.
Allegations of misconduct and abuse differ according to each market but broadly centre on the misuse of influence and market information by some of the biggest financial institutions.
Banks – already the subject of public and political anger for their role in a financial crisis that triggered a near-global recession – are desperate to head off further damage to their reputations, which they fear could lead to more aggressive and costly regulatory changes and further fines.
In the foreign exchange row, nothing has been proven and no-one has yet been charged but banks worldwide have since let go or suspended more than 30 traders.
An FSB report on currency market reform is still to go before the G20, but proposals made in September after consulting major banks and funds – including the longer window –- are attracting criticism on London trading floors.
London is the hub of the global currency market, accounting for about 40 per cent of the money traded on an average day.
Banks refuse to be drawn publicly on the implications of the FSB recommendations for business relationships with the large fund investors who make most use of the daily “fixings”.
But more than half a dozen bankers involved with providing the service have told Reuters privately that smaller banks would be likely either to refuse to accept orders or pass them on to larger lenders, given the additional cost and risks involved.
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