Pension funds and asset managers hedging foreign currency exposure now have access to an alternative FX benchmark offering them substantial savings on currency trades, according to the company which has developed it.
Many institutional investors use the existing so-called “London 4pm fix” – managed by Refinitiv – as the rate at which they agree with their bank to exchange currencies to settle their accounts at the end of every day.
The 4pm fix produces a set of exchange rates calculated as the average at which FX trades take place on the London FX exchanges (primarily Reuters) in a five-minute window centred on 4pm UK time every weekday.
However, the way in which the benchmark operates has faced mounting criticism in recent years after collusion between traders from different banks, resulted in overcharging of institutional clients.
Banks have collectively been fined over $11bn (€9bn) for this manipulation. Meanwhile, regulators are also becoming increasingly concerned about market impact and possible manipulation around the fix; heavy trading just before the window – in order to execute orders – has led to spikes in prices.
The independent quantitative FX surveillance firm Raidne believes its Siren FX benchmark will bring significant improvement to the buyside through a fairer and more transparent benchmark construction.
It snaps the mid-rate in 70 currency pairs, each second, within its price construction, and uses an optimal execution algorithm over a 20-minute window.
“The savings that investors achieve arise from the reduction in market impact, while overall profits by the banks and arbitrageurs are reduced,” said Jamie Walton, co-founder of Raidne. Walton was previously head of the currencies and rates quantitative trading team at Morgan Stanley.
Global FX Code (good practice principles for FX market participants) Principle 9 states that asset managers should “regularly evaluate the execution they receive”.
Walton said: “Siren provides savings of on average over $500 per million dollars in value of trades, which is well above the ‘review threshold’. Siren savings have best execution implications too”.
Raidne provides the Siren savings spreadsheet that allows for any fund to be evaluated, based on historical data, showing the amount potentially saved had the managers switched benchmarks.
Institutional investors do not pay for Siren; Raidne licenses the benchmark to user banks for $1 per million-worth of trades.
Siren is authorised and regulated under the Financial Conduct Authority (FCA) benchmarking regime through the benchmark administrator and data and analytics business New Change FX.
The first trade using Siren was made in January 2021 by a large European asset manager. Seven of the Euromoney Top 10 banks have said they will offer Siren based on customer request, with access gained through existing relationships.