Thomson Reuters have just launched their WM/Reuters 2 p.m. FX Benchmark for corporates to use to value their cross-border transactions. This new benchmark will fill the gap that will be left when the European Central Bank removes their 2 p.m. rate, from July 1, and replaces it with euro foreign exchange reference rates at 4 p.m. which the ECB says is solely for information purposes. Importantly the ECB are actively discouraging the use of this 4 p.m. fix rate for transaction purposes.

The problem with FX benchmarks

FX benchmark fixing rates has traditionally been the way to agree FX prices, but using a 2 p.m. fixing rate for your batch of payment sent at 9 a.m. is no longer useful in today’s micro-second FX markets. A leading FX consultant in the UK, Matt Richardson at BetterFX observed that, “If we look at cable (£/$) on the day Thomson Reuters announced their new benchmark, if a company had submitted a batch of payments at 9 a.m. and then waited for the fixing rate at 2 p.m., it would have cost them around 60 bps due to market movement against sterling. This is clearly not in the best interest of the client who would have wished their transactions executed when the market was more in their favour.”

What is needed is a fair price at the moment you make the payment. There is more and more evidence that the 2 p.m. / 4 p.m. benchmark fixes can be ‘amended’ by all sorts of market behaviour. A new way of establishing the true market price of the currency pair at the precise moment when the transaction is carried out is needed.

New approach

New Change FX, an independent FX consultancy, have a mission, “To provide live, independent benchmarks to foreign exchange market users in order to deliver transparency.” They aim to clarify your FX costs, that is their only business and this is what is missing from the FX market today. Importantly, they have no link to any bank or market makers.

NCFX have developed a true mid-rate (the mid point between bid and offer) spot prices which are calculated every 20th of a second. They take the best bid and best offer rate for each millisecond (from multiple ECN platforms) which removes all these variations, it is the ‘true’ mid-point of the whole market at that moment. This has to be better than a 2 p.m. fixing rate, it is the fairest assessment of FX market at the time that you make your payment. 

NCFX provide live streaming of mid-rate spot prices for over 2,500 currency pairs including forwards and restricted currencies 24 hours per day. Some banks, e.g. RBS, are offering to use NCFX rates + an agreed margin for your payments. 

Andy Woolmer, NCFX Managing Director, commented, “This new WM/Reuters 2 p.m. FX Benchmark brings nothing new, as it is just offering an alternative to a benchmark that the ECB doesn’t think you should be using. Real-time FX measurement is cheap and simple, and can be implemented by any corporate treasurer via Excel today. Why wouldn’t you?“ 

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CTMfile take: FX benchmark fixings represent an antiquated form of execution that continues to be offered to clients.  They are an artefact of the way that business was done before computers, and their use gives those who can execute in milliseconds a huge advantage over those who use a five-minute long fixing window. It should be pretty obvious that if the ECB thinks that actually trading on a Point In Time benchmark is a bad idea, then it probably is. Why swap one bad idea for another?