Global financial regulator recommends charges for FX fixings in deep reform

By Patrick Graham

LONDON (Reuters) - The G20's global financial regulator on Tuesday urged deep-rooted change to how currency benchmarks are set, a response to allegations that dealers at major banks colluded and manipulated rates.

The report by the Financial Stability Board included a request for views on a number of recommendations, which include changes to market infrastructure, systems and how the benchmark is calculated.

Those changes - which the FSB's working group said referred chiefly to the 4 p.m. currency fix in London and that run by the European Central Bank in Frankfurt - would go far deeper than many in the banking sector had expected just weeks ago.

In large part, however, the recommendations focused on the need for the banks to beef up their own compliance systems, controls and codes of conduct, rather than imposing any new external regulation.

It said banks should change the common practice of promising to deliver clients their currency at the "mid" exchange rate set at a fixing. Instead, they should either charge a clear fee or at least include a bid-offer spread depending on whether a client is buying or selling the currency concerned.

Bid-offer spreads are standard in all other foreign exchange trading. They were effectively eliminated from the fixings for the market's biggest fund and corporate clients some years ago, as banks competed for volumes of orders.

"The group recommends that fixing transactions be priced in a manner that is transparent and is consistent with the risk borne in accepting such transactions," the report said.

ISOLATION

The other major change signalled was the group's support for a new independent system to net off the bulk of fixing orders by matching buy and sell orders, and execute the remainder.

Banking sources told Reuters last week that the FSB had been considering proposals for a system that isolated fixing orders to keep them out of the hands of speculative traders - mostly hedge funds and spot dealing desks at major banks.

"(The group) also is interested in seeking feedback from market participants on the development of a global/central

utility for order-matching to facilitate fixing orders from any market participants," it said on Tuesday.

Until just weeks ago, senior players in foreign exchange markets had thought the FSB's working group was likely to take a cautious approach on the fixings, preferring to wait for the conclusion of around a dozen regulatory investigations worldwide.

But two sources with knowledge of discussions with the FSB told Reuters last week that UK-based bankers and officials had exerted pressure to end the dispute quickly. They were concerned at the effect it was having on markets that are central to London's role as a financial centre.

Britain's Financial Conduct Authority and the U.S. Department of Justice opened investigations last October into allegations that senior traders shared market-sensitive information relevant for the London fix, which is set at 4 p.m. London time, using actual trades.

London is the hub of the global currency market, accounting for some 40 percent of the $5.3 trillion traded on an average day.

The WM/Reuters fix relates to exchange rates, including the euro, sterling, Swiss franc and yen, and is compiled using data from Thomson Reuters and other providers. They are calculated by WM, a unit of State Street Corp. Thomson Reuters is the parent company of Reuters News, which is not involved in the fixing process.

The FSB said banks and other market participants have until Aug. 12 to respond before final recommendations are sent to G20 leaders in November.

(Additional reporting by Anirban Nag and Jamie McGeever; Editing by Larry King/Jeremy Gaunt)