What are WM Reuters Benchmark Rates
WM Reuters benchmark rates are spot and forward currency rates used as a reference in financial valuations, measurement, and index calculations. FX Benchmark rates are foreign exchange rates that are used as standard rates for portfolio valuation and performance measurement. The WM Reuters Closing Spot Rate service was launched in 1994. It provides standard forex rates that allow portfolio valuations to be compared more accurately against one other. It also helps compare financial benchmarks without taking currency differentials into account.
The WMReuters FX Benchmark rates are provided by Thomson Reuters. Reuters acquired the World Markets Company (WM) rate calculation business from Boston-based State Street Corp in 2016.
WM Reuters Benchmark Rates – A Closer Look
Daily closing spot rates for 40 currencies were provided by the initial WM/Reuters service. Since then, the service has grown to include 155 closing spot currencies on an hourly basis. Furthermore, WM Reuters provides hourly intraday closing rates for currency forwards and non-deliverable forwards (NDF). Additionally, there is historical data for spot, forward, and NDF rates. WM Reuters benchmark rates are utilized in the computations of most major equity and bond index compilers. However, the rates are also used for other purposes. For example, calculating benchmark rates for the settlement of financial derivatives. Some banks commit to their most valued customers the guarantee that they will trade at the WM Reuters prices.
In 1994, the WM Reuters benchmark rates were established as standard forex (foreign exchange) rates. This filled the need for a single established standard for foreign currency rates including spot and futures. As a result, portfolio valuations can be easily compared to one another and to financial benchmarks. The WM Reuters benchmark rates are also known as the 4 pm fix. This is because they are released at 4 p.m. London time every business day. Every day, banks and investors all over the world use these daily forex rates. For example, to set the value exchange for large sums of money.
Institutional investors frequently execute foreign exchange transactions at a fixed market benchmark rate. The appeal stems from following benchmark indexes in other asset classes. Currency conversion can be accomplished using the same underlying FX rates as their target index. Furthermore, the aggregation of fixing trades by market makers prior to execution boosts liquidity. Ultimately, this allows clients to trade huge volumes of FX at a trusted rate.
WM Reuters – How Rates are Determined
These rates are significant because they are used to value trillions of dollars in investments. These investments are owned by money managers and pension funds across the globe.
- 5-minute fix window – The WM Reuters benchmark rates are calculated over a five-minute fix period. The interval stretches from 2 minutes 30 seconds before to 2 minutes 30 seconds after the fix time.
- 4 pm fix time – The time is typically 4 p.m. in London.
- Bids, offers, and trades are matched and logged – Bid and offer rates from the order matching system, as well as actual trades conducted, are logged during this five-minute window.
- Statistical sampling is used to calculate the median rate – Because trades happen in milliseconds, only a sample of them is recorded, rather than all of them. The median bid and offer are determined using legitimate rates throughout the specified time period, and the mid-rate is calculated from them.
The Data Source for the determination of Non-Trade Currencies is Refinitiv indicative quote data. Over a five-minute period starting 2 minutes and 30 seconds before the hour and/or ½ hour to 2 minutes and 30 seconds after the hour and/or ½ hour, snapshots of quoted rates are taken every 15 seconds. The median bid and offer rates are calculated from the individual snapshots for each currency. These bid and offer rates are validated prior to publication against currency-specific thresholds and this may result in expert judgment being applied. Over a five-minute period, traded rates and bid and offer order rates from the platforms are captured every second from 2 minutes 30 seconds before to 2 minutes 30 seconds after 4 pm UK time. All traded rates are subjected to validation checks which may result in some input data being excluded from the benchmark determination. (Source: refinitive.com)
Benchmark 2013-2015 Fix Scandal
In 2013, the method of fixing the WM Benchmark rates came under intense scrutiny. This was after widespread allegations of collusion and rate manipulation by traders surfaced. It was further alleged that some big banks paid billions of dollars to manipulate WM/Reuters benchmark rates in their favor.
According to five dealers with knowledge of the practice, traders at some of the world’s largest banks manipulated benchmark foreign-exchange rates used to determine the worth of trillions of dollars of investments. Employees have been front-running customer orders and fixing WM Reuters rates by forcing trades through before and during the 60-second windows when the benchmarks are set. This is according to current and former traders who asked to remain anonymous because of the sensitivity of the practice. Dealers cooperated with counterparts to increase the likelihood of moving rates, according to two at least two sources. These allegations come from insiders who have worked in the sector for a combined total of more than 20 years.
According to the two traders, the behavior occurred on a regular basis in the spot foreign-exchange market. Further, it has been going on for at least a decade, influencing the value of funds and derivatives. According to a person briefed on the situation, the Financial Conduct Authority, Britain’s market regulator, is considering an investigation into alleged rate manipulation.
“The FX market is like the Wild West,” said James McGeehan, who spent 12 years at banks before co-founding Framingham, Massachusetts-based FX Transparency LLC, which advises companies on foreign-exchange trading, in 2009. “It’s buyer beware.” The $4.7-trillion-a-day currency market, the biggest in the financial system, is one of the least regulated. The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges. (Source: bloombberg.com)
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