EBS, the institutional FX ECN division of ICAP plc (LON:IAP), has been approached by several major banks to provide a fully automated, central system removing much of the human element with regard to setting FX benchmarks, thus negating the possibility of manipulation and collaboration between traders in various institutions in order to adjust rates to their benefit.
A computerized system which negates the requirement for human involvement in this particular area has been on the cards for a reasonable amount of time, largely as many firms view its beenfits as a means of reducing the risk of sensitive client order information seeping out and increasing the scope for wrongdoing in the trades that set benchmark exchange rates used to value trillions of dollars of investments daily.
EBS launched its eFix solution last year to help banks to match off their orders to buy and sell currencies at the daily “fixings”. A report by Reuters states that the eFix solution stops short of the outright central facility looked at by the Financial Stability Board (FSB) last year to take in, net off and process orders anonymously and independently of the bank trading desks at the center of a two-year long row over market manipulation.
“EBS Market is well positioned to play the role of a central utility for the execution of benchmarks globally,” Darryl Hooker, head of EBS Market, the platform’s main product suite, told Reuters. “We’ve been approached by a number of the major banks with regard to providing a netting facility to our eFix solution” he said.
The FSB’s final recommendations last year abandoned the idea of ordering the creation of a fixing utility, saying that it saw the potential for the market to generate such a solution without official intervention.
The Reuters report states that a number of financial technology companies and exchanges have expressed interest, though the task is complicated by the need to get enough banks on board to ensure sufficient demand on both sides to match off most buy and sell orders.
Another matter for refinement is the method of dealing with residuals, which are situations in which a large number of sell orders are not matched on a given day by equivalent buying interest, leaving the facility or the asset managers behind the orders holding the risk of a failure to execute or of execution at worse rates.
Mr. Hooker was careful not to be drawn on the details of how EBS would deal with this issue, but Reuters considers that it may involve at least one large bank standing behind the facility to absorb the risk.