The FSB, which brings together regulators, central bankers, and government officials from the Group of 20 (G-20) nations, proposed changing how the most popular benchmarks from WM/Reuters are calculated, including extending the one-minute windows in which rates including the key 4 p.m. London fix are set.

"Changes have to be made, and FX more broadly may need to be brought within regulation," Sharon Bowles, a former head of the European Parliament committee dealing with financial regulation, said by email. "The issue of not just culture but an absence of ethics has to be tackled. Too much has been accepted as normal even by some professional investors."

'Appropriate Width'

Widening to five minutes, in line with the median response in a public consultation, "strikes a balance between reducing incentives for manipulation while at the same time still ensuring the fix is fit for purpose by generating a replicable market price," the Basel, Switzerland-based FSB said in a report today.

The FSB backed away from setting the industry standard window itself, recommending "the appropriate width of the window should be determined, and regularly reviewed, by WM in consultation with market participants."

"The size of the window should not be fixed for all time nor, ideally, dictated by the authorities," the group said.

Other recommendations from the FSB include more detailed codes of conduct for currency trading, and that "index providers should review whether the foreign-exchange fixes used in their calculation of indexes are fit for purpose."

The FSB recommended that "banks [and other FX dealing intermediaries] establish and enforce their internal guidelines and procedures for collecting and executing fixing orders including separate processes for handling such orders." Firms should "establish distinct and separate processes for managing fixing flows," the group said.

Asset managers "should conduct appropriate due diligence around their foreign-exchange execution and be able to demonstrate that to their own clients if requested," according to the FSB.

"Investors need confidence in the administration of benchmarks, so we welcome the FSB's recommendations" and a previous report from the International Organization of Securities Commissions, Richard Metcalfe, director of regulatory affairs at the Investment Management Association, said by email.

"We note the focus on a variety of factors and players in both reports," Metcalfe said. "They consider not just administrators but indices that embed FX rates, investment fund mandates, and of course trading activity. With rigorous policing by supervisors, they will be a step towards restoring confidence in FX benchmarks," Metcalfe said.

Tightening the rules for currency benchmarks would spur some banks to close down their foreign-exchange arms, according to State Street Corp.

"Is it worth setting up all these extra controls, hiring additional people, setting up a separate space, or do you want to just get this off your plate?" State Street senior managing director Chip Lowry said on Sept. 25 in Chicago. "My guess is some banks will exit the business."

Price 'Distortions'

State Street spokeswoman Lucy Davidson didn't immediately return a message left on her phone.

The FSB plan was welcomed by associations representing banks and traders as a step forward in combating manipulation of key rates.

"Lengthening the time frame in which to fix the benchmark rate would limit opportunities for manipulation and make it far less likely that large volumes of business would create distortions in market price," the ACI, a foreign-exchange industry group, said in an emailed statement. 

The FSB is led by Mark Carney, governor of the Bank of England, and consists of regulators and central bankers from around the world that seek to standardize global financial rules.

The board, which reports to the G-20, set up a task force last year to try to repair or replace tarnished benchmarks in the wake of attempts to manipulate the London interbank offered rate, or Libor. It said in February that it would extend this work into currency-market benchmarks.

A longer window would "foster more confidence that the benchmark is a truer reflection of the actual supply and demand for the currency at that point," said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.

The FSB is seeking agreement on a range of policies before G-20 leaders meet in Australia in November, at the heart of which is a package of measures aimed at ending implicit government support to large financial firms. This includes requiring banks to hold an additional loss-absorbing buffer that can be quickly written down in a crisis and amending derivatives contracts to allow regulators to suspend them in a crisis.

WM/Reuters rates are published hourly for 160 currencies and half-hourly for the 21 most-traded. The benchmarks are based on trades in a minute-long period starting 30 seconds before the beginning of each half-hour. The most widely used is the 4 p.m. London fix.

WM Co. said in an e-mailed statement that it "fully supports" the FSB proposals.

Bloomberg LP competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

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