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Published On: Wed, Jul 23rd, 2014

Forex London: Does the Closing Currency Fix Work?

Speculative currency trading involving big numbers is the norm when it comes to transactions in the forex market.

A stereotypical caricature of a villain photo/wikimedia

A stereotypical caricature of a villain photo/wikimedia

The global foreign exchange market generates a daily turnover that exceeds $5 trillion almost every trading day and whilst that sort of weight of money should preclude the chance of anyone being able to artificially fix some currency rates, there are some who suggest that there are problems which need addressing.

The currency fix issue

If you are someone who is familiar with investing in forex, you will no doubt be aware that the closing currency fix we refer to, is the benchmark foreign exchange rates that are set at 4pm London time each day.

These are known as the WM/Reuters benchmark rates and were first introduced in 1994 as a method of allowing portfolio valuations to be compared more accurately against other financial benchmarks, without the need to account for currency variances.

Potential for collusion

The benchmark rates are presently determined on the basis of actual buy and sell transactions that have taken place during a predetermined 60-second window that is 30 seconds either side of 4pm London time.

This process is the method used to set the benchmark rates for 21 major currencies based on the median level of all the trades that are processed during this time slot.

Considering that this WM/Reuters benchmark rate is then used to value trillions of dollars of investments being held in pension funds and by money managers around the globe, there is an opportunity for collusion as it stands at the moment.

Forex traders could in theory set these rates at an artificially high level during this set time periods, allowing them to create a potential profit through this process of manipulation.

Time for change

There have been incremental changes made to the system during the two decades that it has been in existence, but WM/Reuters in collaboration with bodies such as the Financial Conduct Authority in the UK, have recently announced their intentions of a radical overhaul of the system.

One of the more fundamental changes that are being proposed is the widening of the one-minute time window which is currently used to create a snapshot of transaction, due to vulnerability in the system that currently exists for possible exploitation.

Lack of regulation

Aggressive buying or selling of stocks and shares attracts some severe financial penalties for any trader that is caught trying to rig the prices in this way but the largely unregulated forex market is not currently subject to the same rules and regulations.

Buying and selling of currencies for immediate delivery is not presently classified as an investment product and is not therefore by the same rules of conduct that govern most financial products such as stocks and share dealing,

Libor lessons

The Libor rate fixing scandal that led to some serious fines for organisations and traders who were found guilty of rigging market rates has led to a raised level of concern that forex markets could be the next big story to break.

Dozens of regulators around the globe are currently looking at how this market operates and WM/Reuters is also deliberating on whether to validate its rates by comparing them with information from a trading platform.

The closing currency fix does in theory work, but there are plenty of eyes watching to see whether any manipulation has taken place and how the system can be tightened up in the future.

Guest Author :

Archie Quinn is always reading up on the Forex market, because he can’t learn enough about it. He likes to share his successful trading habits with new traders to the Forex world by posting on various financial, Forex and investing websites.

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  1. Global financial watchdog calls for FX fix reforms, urges banks to clean up | CREATIVEON says:

    […] Forex London: Does the Closing Currency Fix Work? The global foreign exchange market generates a daily turnover that exceeds $ 5 trillion almost every trading day and whilst that sort of weight of money should preclude the chance of anyone being able to artificially fix some currency rates, there are … Read more on The Global Dispatch […]

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