The world's top banks have backed the bulk of recommendations from regulators to reform the setting of the leading global currency benchmark following allegations of market rigging, making changes inevitable.
The $5.3 trillion-a-day foreign exchange market is the world's largest and least regulated financial market and is being investigated for collusion.
At the center of the investigations is activity around the WM/Reuters currency fix at 4 pm local time in London, a 60-second window at which major exchange rates are set. These prices are used as reference rates for trillions of dollars of investment and trade globally.
Last month the Financial Stability Board (FSB), the regulatory task force for the Group of 20 economies (G20), proposed deep-rooted change in a document put out to public consultation.
"We agree with and support many of the recommendations set forth in the consultative document and believe they can produce a number of benefits for all FX market participants," a group of trade associations said in a letter to the FSB, which was made available to the media on Wednesday.
The group represents 23 global banks and dealers, which account for about 90 percent of the market.
The WM/Reuters fix is compiled using data from Thomson Reuters and other providers, which is calculated by WM, a unit of State Street Corp.
The FSB will present its final plans to reform the forex market to G20 leaders at a summit in November.
ON THE DETAILS
The FSB had suggested a wider period for the fixing window, a move the banks cautiously supported.
"While we believe the positive impact of a wider fixing window may be limited, a marginally wider window, that is by doubling or tripling the width of the existing window, could be beneficial in reducing concentration of trading volume and, in certain circumstances, volatility," the letter said.
Asset managers told Reuters earlier this week that the window could be widened by up to 15 minutes on either side of 4 pm.
The banks backed a fixing based on a wider range of market data, even though adding that there is "no material variability" among sources of currency prices.
The group also supported more transparency in charges to asset managers for transactions related to the fixing.
"There should not, however, be a prescribed cost, markup or fee structure on fixing transactions," the letter said.
One of the FSB's more radical ideas is the creation of a stand-alone platform to execute transactions for setting the currency benchmark in order to isolate the fixing from speculative traders.
The banks called for a rigorous cost-benefit analysis prior to the development or creation of new execution facilities.
With centralized execution facilities, the role of dealers as market-makers would be cut or scrapped and they would no longer be absorbing risks in the market, the letter said.
A more economical alternative to a new platform could be to push ahead with the FSB's other proposals, such as widening the fixing window or using a different way to compile the benchmark, the banks' letter added.
The FSB has suggested the use of so-called time-weighted average pricing, or TWAP, based on the average price over the window, but the banks say this approach is "not optimal" and that users may prefer to stick with the current method.
"The implementation of these structural reforms may eliminate the desire or need for the creation of new centralized execution facilities," the letter said.
Thomson Reuters is the parent company of Reuters News, which is not involved in the fixing process.