Transcript of Question & Answer Session Panel participation at ACI/Refinitiv on the Evolution of FX Benchmarks

Well, good afternoon everybody and good morning, depending on which time zone that you're in, and welcome to this webinar on the Evolution of Foreign Exchange Benchmarks. My name is David Clark, I'm a member of the Bank of England's Foreign Exchange Committee, I'm a former President of ACI, and I'm a Director on the board of Refinitiv Benchmark Services Limited, which is the producer of WMR.

I'm joined today for this panel session by Shirley Barrow, who is the Chief Executive of the RBSL, Refinitiv Benchmark Services Limited, Benchmark and Indices, by Mark Lawler, who's the Head of Markets Transformation at NAB, and Stuart Simmons from the Head of Currency at QIC. We also have with us, I'm very pleased to say, Dr Guy Debelle, Deputy Governor of the Reserve Bank of Australia, and who chairs the Global Foreign Exchange Committee. Guy was also the co-author of the report on Foreign Exchange Benchmarks, which was published by the Financial Stability Board in September 1914.

That report did recommend some changes to WMR, after the issues that we'd had with the fixing problems earlier in the decade. And there were three particular changes that were recommended in that report, relating to methodology, the governance of the benchmarks, and to the length of the window. Now that was six years ago. A lot has happened then in the foreign exchange market, and especially with technology. A lot of people are much more used to using the fix, that it has also thrown up one or two very interesting issues that received a great deal of comment earlier in the year, concerning how the methodology worked, the result of the methodology.

And it was as a result of that, that Shirley and her team in the UK, looked very closely at the entire framework of WMR, and did a great deal of work to ensure that the governance aspects were working correctly, that the surveillance was working correctly, but above all that the methodology was working. Shirley, can I come to you first, please? Could you just give us an overview of what your team investigated and what the outcomes were?

Absolutely. Thank you, David, and hello to everybody. Much appreciate the opportunity to be here today. So, yes, I think, we very much appreciate being the fact that we are providing a global FX benchmark, as you say, that the equality and the appropriateness of the methodology of WMR is accurate and is preserved. You know, the primary objective of WMR is to make sure that we are providing that accurate representation of the FX market, at a particular point in time, and for every currency that we cover.

You've touched on some really good points, that some of the drivers behind what we have been doing over the last few years is driving transparency around what we do and how we do it, combining that objective really with the requirements of a robust methodology, which is absolutely paramount to provide that integrity and create a real credible benchmark. And also, really driving that confidence and trust in users who have those high expectations, quite rightly, when using an FX benchmark.

So, at the outset, or certainly from Q1 this year, we've done a few things, actually, because as I say, it's really important that we assess how we are performing and how the methodology is performing and I would take on two things that we were quite focused on. One was doing some data analysis, and this data analysis was much more comprehensive than looking at what WMR was providing. This was really looking at the market structure and the market with which WMR sources data from. And we leveraged our monitoring and surveillance team here, who is independent from our operations team. So they really were set with an objective of looking at the markets and have more, as I say, a wider view of it, looking at it objectively and looking to plot and analyse market movements, market trends, looking at the WMR, how that moves correspondingly to the market, what the market impact might be.

And we looked at that from Q1 to Q3, and very much focusing on things like liquidity, volatility, behaviours, intraday patterns and things like that. And I think we're at the stage now that we have this wealth of information from that data, and we're now taking the next step of that. What are we going to do with this data? So we have had some discussions internally and we've leveraged some of the experience from our oversight committee, which has some really great market practitioner experience on that, and independent from ourselves, which is important, too. We're also looking to discuss this data with our user groups, and I'll come onto those in a little moment, but it's really important that we get an understanding, again, of their views, their observations, and what this data may actually be demonstrating to us and might be helpful for us in moving forward.

But also, it's not our data, so we are working with our platform partners, but we would like to work out what we can provide more publicly, as well, because we do feel that it's really important, as I say, that transparency aspect and what we can do there to really further that and provide users with that greater kind of awareness of WMR in the market, and hopefully assist understanding when they're reviewing their WMR requirements and looking at, as I say, the impact of the market, and also what behaviours and things might be displayed over that period. So I think the data analysis, as I say, and looking at that wider view, and really driving that engagement, is something that we are really focused on and it's still in progress at the moment, as was suggested.

The second piece I would pull on is around, we've been focused on highlighting awareness of WMR and really driving some further engagement around that, too, with our users. With regards to the awareness, it's really focused on sharing more details of the methodology, articulating the framework within which we operate. So you mentioned, obviously, with a regulated benchmark. So we are complying with the EU benchmark regulations. We are supervised by the FCA, and this obviously provides us a real construct within which we operate. It's important, I think, that the requirements of that are understood and it is reflected through our methodologies, as well.

But what we've also been doing is trying to raise awareness around some of the more interesting things, too. We did some public articles around WMR, and we have been doing more liaison with representatives within different regions, so FX committees, we've been updating the methodology documents, so again, trying to articulate greater clarity into that document, provide more details in that document where we can, and really trying to do that education, as well. So people have a real document of reference to help them understand what WMR is calculated. It's quite complex in places, but we have been trying to make it quite clear there.

But a really important part which I wanted to touch on, was our initiative around re-energising the user groups that we had. So, as you mentioned the FSB, one of the recommendations of the FSB in 2014 was around formalising user groups. We've always had a kind of open-door policy. We're very happy for users to contact us with any queries, any challenges, any discussion topics, but quite rightly it was identified there can be a real use of more formalised user groups. So we have these established, we have an Asia Pacific one, and we have a India Americas one, which is combined. And what we've really been doing there is, as I say, kind of re-energising those. Bringing the group back together, actually adding more people to these groups as well, because we're always really interested in doing that, just so that we get a wide spectrum of users, both on the buy side and the sell side and we can really get some constructive dialogue happening.

So what that is, it's an informal forum, but it is, as I say, the users, but it's those vendors that are really interested in what WMR is doing, how it's doing it, how it could do it better. What we should be looking at, and how we could be expanding it. So it's really their views, opinions, suggestions, discussions, enhancement. And obviously over this period, we have really been doing a bit of a deep dive on certain aspects, such as discussions around the market structure, and the impact on WMR, or vice versa, the impact that WMR has on the market structure. Around the length of the window. Obviously there has been some suggestions, is the length of the window the right timeframe? So at the moment it's five minutes. Is that still the most appropriate window? We've been looking at the spreads and the dynamic mechanism that we have to do that, and data sourcing, as well.

Yeah, so I think we've been very active and we're hoping to bring more visibility to that activity, as well, to our users, who are really at the centre of what we do and we really do appreciate that. The only thing I would finish up on, and before I take up the entire panel, is change is really part of the DNA of WMR. Obviously, it's been around for quite some time, and the way that we have sustained and moved forward has all been around making sure that we move forward with advancements in technology, advancements in the market, advancements in data sources and advancements around algorithms.

So change is really important to us, and it's really important that we engage, as I say, with users to drive that change, because it's important that that change is the right change. Achieving outcomes that we would want it to achieve, that we understand the potential consequences around such changes. Inevitably, there always are consequences. And at this time, there's no specific changes identified, but we're still having the dialogue, having the discussions, and obviously having this opportunity today, as well. So I think, lots going on, and we're still working through some of the work streams, as well.

Shirley, thanks. Let me, as we open this up to the panel, there is a great deal of work that has gone on. Could you say a few words about data sufficiency and how that relates to the traded and the non-traded currencies calculations?

Certainly. In the WMR's methodology, we do distinguish between two types of currencies, as you mentioned there. One we call the trade currencies, and one we call the non-trade currencies. And the differentiator there is that the trade currencies are principally sought, the data is sought from the platforms. So at the moment we have three trading platforms that we use in the calculation. We have Refinitiv matching, we have EBS, and we have Currenex.

If we are sourcing the data from one or multiples of those, then it falls into our trade currency criteria and there's a specific methodology around that. The non-trade currencies are not currently liquid enough on any platform that'd we've found and therefore we don't have the opportunity to use transaction data for these currencies. Rather, it uses indicative data that we source from the Refinitiv platform. So it's still a very robust mechanism through to sourcing the data, as there's multiple different data sources that we use, but it's not from a transaction platform.

So just quickly go into the trade currencies, and as to your point, one of the key criteria for any kind of methodology is obviously that data sourcing, and making sure that we have sufficient data upon which to calculate a methodology and a benchmark. So what we have now, I think, we've had it for quite some time, but the in vogue definition of it now is a waterfall. So I would suggest in our trade currencies, our waterfall mechanism is that our primary data is to use the executed trade data. But again, like we said, there has to be sufficient data for that to be used. If there isn't, then our secondary or our second waterfall, if you will, would be to use the order data. And then, as a tertiary, last resort if you will, we've got the indicative data, as well. So we have those three layers in the trade currencies.

Okay. Can I ask the panel, then, Mark and I come to you on this? Do you feel that the methodology that Shirley described there is well enough understood by the marketplace, and in particular, the difference between traded currencies and those that don't have sufficient data so they are taken from a different methodology?

Yes, thanks, David, and good morning to everyone else, and thanks for the opportunity to participate on this panel discussion. Look, I think the title for this forum about the evolution of the FX benchmarks is totally appropriate. I can't believe it's seven years ago since the significant changes that occurred, and it is evolving. The first important thing to get right, back then, and even today, is methodology and to ensure that the wider community, both buy and sell side, has confidence in that methodology and equally as important is the understanding of it.

And, look, I've been around the FX markets probably too many years and I know that this year in particular, there's been some discussion. We've had a significant test of reliability in the markets through the COVID crisis, and particularly in March with the volatility rates, at some stages were quite extreme. And there's been some post-discussions around some data events that occurred. And whilst the methodology is well understood by many, I think there's probably a range of level of understanding that still needs to be updated and communicated to the wider community. So my question back to you, Shirley, and in general layman terms, how does that FX benchmark come about when we've got 300 data points over the five minute window, not to get into too much detail, but just so maybe for the benefit of those in the audience who don't have the most in depth understanding of what's been discussed previously around the methodology of the FX, in particular, portrayed it.

Yes. On that point, actually, Mark, can I just remind everybody who's dialled in, that if you wish to ask a question, please do so through the channel that you have, and we will put that to the panel. I'd like to come to Guy last on this particular topic of methodology, but Stuart let me come to you. How important is it to you to understand the way in which the methodology has evolved in comparison with the way in which you, and particularly in your position at QIC, use the benchmark?

Yeah. Thanks, David. I'm not so concerned about how it's evolved. I think we're all across how it's evolved and I think there's enough information from Refinitiv to make a determination of how the Fix is determined and while there has been a couple of stewards inquiries that we're aware of, I think there is enough information there if people want to seek it out. I don't know though that there is or has been enough really, investigation or questioning from some users of the Fix to really determine how much impact some of the flows actually have and really questioning whether usage of the Fix really meets their interests or objectives and there are different objectives, of course, for different investors, but, I think there's a line of questioning that users of the Fix can have to determine whether it really fulfils their needs.

Yeah, that's an important answer to the question. I think because the user groups really … Shirley and the team rely on the user groups to let them know how people are feeling about that. Guy, can I ask you when you did the work that that was done back in 2014 and came up with the recommendations that you did in the report, what were your feelings then about the methodology and have they changed in the meantime?

Thanks, David. Just before I get that, I think I just like to note that it's really good to have Shirley on this webinar today and have her particularly talking to people in this part of the world. One of the things we've been talking about, the GFXC is ‘it would be great if WM got out there and talk to people’ and here we are. So I think that's wonderful that Shirley is here and talking with us today. I think it's important to separate a couple of things here. So there's the calculation methodology versus what you using the Fix for and I think people often conflate them a bit and then they blame … We'll use word blame, maybe that's a bit unfortunate, they blame WM for both. But WM is the calculation agent, that's what they're there for. The use of the Fix, that's up to you, the user, and you should be asking a question, as Stuart said, as to why am I using this? Is this what I want? Is it appropriate for my needs? That's up to you, the user. That's not so much a question for WM. WM is out there being the calculation for these FX benchmarks and obviously particularly for the London 4pm.

I suppose when Paul Fisher and I did this work, probably seven years ago now, we were stunned at the lack of understanding of most users about the Fix, and very few had any understanding about the methodology at all, to be frank. A lot of them weren't even sure beyond knowing the name of it, really what it was about, which when you think about the impact that has on a lot of people's businesses and financial returns, we did find quite extraordinary. I think moving ahead to where we are today, I think people's understanding of it has increased quite a bit.

So I think there is much better understanding of it now than there was back in 2013, but I still think people don't quite ask the question as to whether they need to be executing around the Fix, whether that is the right time for them to be doing that. And that said, I think we've got to separate that question from the calculation question. You can understand the calculation that doesn't necessarily mean that it's fit for purpose. But I think there is much more visibility around the calculation now, people I think broadly understand how it goes. They don't necessarily understand the detail, but maybe that's okay. I think the question, I think has moved on a bit from the calculation methodology to the why.

Okay now, with that, let me become onto the why, Guy, in a minute, and we'll probably come back to you with that again, but can I just ask two more questions Shirley? Or raise two more issues to see if there are issues on the methodology, one relates to the calculation of cross rates and the other to the use of the median versus the average. Have you had Shirley, in the last few months when you'd been looking at that, have you come to any conclusions about whether or not anything can be improved in terms of the methodology, in respect of either using cross rates in a different way, or using averages in a different way, and please invite the other members of the panel to comment on that.

Great. So just to start off, the difference I mentioned that the heart at WMR is about creating a benchmark, which is an accurate representation of market. But also combining that with protecting the integrity of it and promoting that trust and confidence. So it really combining those requirements and therefore there's a number of variables in the methodology design to achieve that. So Mark mentioned a few moments ago about touching on the methodology and giving a sense of that and as you said, there's a couple of things you mentioned there with regards to some fundamental points in the methodology. A couple of things that I would mention around the data sourcing, firstly, it's around the fact that I mentioned we use transaction data, we try and use the most appropriate data source that there is for currency. We sample that data over that five minute window.

And although we capture data through that five minute window, actually we're capturing data on a 24 hour basis. So we see the market around those times as well and of course we have our intraday service which provides the trade currencies every 30 minutes. So we're very focused and looking at the markets all the time, rather than just actually, looking at a five minutes snapshot. And one of the things that we recognised as well as you said moving forward into the calculation piece, is there's a number of ways of calculating a methodology and we use the median. So just to back up a little moment, what we do from a trade perspective is we sample the page and given executed trade from the platform. We define a two way price from those so that we apply the spread from the top of the book to calculate the other side of the trade.

So in essence as we execute we trade, we actually have what we would term a bid and offer rate. And this next part goes further to your point, David, that we then calculate a median of the bid and the median of the offer independently. And there's been dialogue and discussions quite recently, even internally around the use of the median versus the average. And one of the real qualities around using a median is that it gives you kind of greater opportunity, shall we say, to be moved to the extremes. So it has that advantage and therefore creates a kind of more stable view of the time period.

It's also recognised as a good statistical method for calculating the middle, if you will, when there's not a kind of standard distribution and when obviously, we're talking about FX market, that's unlikely to be consistently achieved. And I guess the other piece of it as well is that it actually modelled back. So to influence a benchmark is more difficult from when you're using a median. So actually, we had a conversation with our oversight committee about this quite recently. And given that we are doing this balancing and combining these multiple requirements. The outcome of that was we felt the median was an appropriate method. There are others, absolutely. But given this juncture and given the requirements that we have, and ultimately it provides that accurate representation of the market. Yes, the outcome of that was that we would persist with the median at this juncture. I think other things to mention regarding the methodology is that there's an awful lot of that validation processes that are inbuilt into that. So again, around that validity and accuracy of the methodology.

So we talked about data sufficiency a moment ago. We have those minimum thresholds to ensure that we have enough data. We do quality assurance, validation checks on every piece of data, both the data that we're capturing, but also the kind of calculated benchmark rates before they're published as well. So, for completeness, we have quite an in-depth, reasonably, perhaps complex in places methodology, which as a say we're trying to make more clear in the documentation that we have. But there's a number of steps that we are combining the requirement for making sure that the data is accurate, representative and also robust. And just touching on the point …

Yeah, go ahead.

You mentioned the cross rate. Yeah, so the cross rate as standard, we produce the data to Dollar, Sterling and Euro and a few additional ones such as the Australian Dollar, at particular times of the day and we have limitations in those cross rates. We're very clear that in our methodology, some of the calculations that we don't take in, for example, the T+1, T+2 settlement differentiation. Again, in our methodology, we're very clear about how we do the cross rate calculation and the limitations that has currently.

Okay, thanks.

David, can I just jump in?

Yes. Please.

Just very quickly? One thing I should've said, and Shirley brought it up and I really validate what she says. I feel that the methodology is much more robust than it was, and more data sources as Shirley said. So, that was one point I really should've made in terms of a material improvement than seven years ago.

Okay, I know, thanks for adding that Guy and I've actually re-read the report yesterday and you referred to that in the report. This is a good time to have our first poll, because all of you dialling into this and listening to this, you'd have heard what Shirley said and the contributions from Guy, Mark and Stuart. We've got a poll question for you, which is, do you believe there are better methods to produce similar or better results?

It's like a big exam question, that one, but it's pretty important. And you've heard how much effort goes into a methodology. You're not expected to know what the methodology should be by the way, but do you think that the methodology is doing the job that it should do, or would there be better methods available? Let's move on to the theme, which Guy raised a short time ago, and which has taken up as Guy mentioned, that a lot of our time in the Global Foreign Exchange Committee and the subcommittees but work around that, and that is the use of a benchmark.

Now Guy, let me put you on the spot a bit here when you with Paul Fisher looked at this, and what we're looking at here is a fixing, which becomes a benchmark or a reference rate or an index. I'm not quite sure when you looked at this, how did you feel about the product and what the users wanted out of the product?

That's an interesting question, David, because to some extent, I'm not sure that many of the users thought about what they wanted out of the product at all and that was part of the problem that Paul and I highlighted. A few more people thinking more about what they wanted out of the product would have actually been a good thing. But to get to your question, the thing was that people were using it for everything. So if you're using it as a valuation tool, then fine, you need something like this to value your portfolio on any given day. So, that's fine.

It's when it's the transition from that to an execution tool, I suppose, which is where I think some of the thought processes didn't really go. And a lot of the thinking was, well, when you say, "As long as I get the Fix, then I'm fine", rather than asking the question, is the Fix what I actually want to be getting? Is that actually best execution for me? Is that really where I want to be transacting? Generally, the presumption was if I've got zero tracking error, then job done. I'm a fixed income person or I'm equity person and I don't understand foreign exchange. It's like, well yeah, but you're running a global portfolio and FX is going to have a material impact on that portfolio. So at least a bit of understanding about what you're doing here or what people are doing on your behalf here, wouldn't go astray. And I do think there has been a lot more questions asked about that. But I still think there are more questions which could be asked by market participants about that.

And I suppose to that point and Mark mentioned this earlier, back in March ahead of the March quarter end, the GFXC, we were somewhat concerned about the volatility, which was around at the time and what that might look like. And we did put out a media release which did ask people to think about what they were doing, consider whether they needed to be executing at March quarter end and just highlighting that there probably would be a reasonable amount of volatility. In the end, it actually wasn't too bad, but it did seem to cause some behavioral changes and people bringing forward some of their transactions ahead of the end of the quarter. Which at least indicates that some people are thinking about what they're doing and how they're doing it.

Yeah. Stuart, I really must come to you next because your real life buy-side user. Let me ask you a simple question, why do you use a fixing?

Yeah or do you use a fixing and there are occasions in forex that are …

Or do you, yeah. Do you use a benchmark, that's why I mentioned – sorry, go on.

Yeah, I think one of the points that Guy mentioned is you need to have a differentiation between using the Fix as a reference, rate to value portfolios, but also on the other side of that is executing at the fix. And just on that executing at the Fix and just thinking of users in general, just to add a bit more context I guess, to what Guy mentioned. There are a lot of attractive attributes around executing at the Fix because it's got a heightened trading volumes, very deep and liquid markets. There are lower bid-ask spreads, you've got the possible netting of orders with other participants. There's the aspect of greater transparency that you get from that reference rate, particularly where there might be perceived conflicts of interest. And there's also a sense that users can generate operational scale from that.

I don't think there's any dispute about those points, but one of the … or probably the main thing that people aren't really considering, is that the user of the Fix is exposed to that net order flow during and even before the fixing window. And really this is an unobserved cost of trading at the Fix, which often has a material market impact because each individual user, they really consider their own self-interest. They think that their own individual flow is not material enough to impact the market during such a liquid period.

But however, when you consider that collective of participants who are operating in the same direction, this does generate a very significant market impact. Often even before that fixing window begins and that can act as a real disadvantage for users at the Fix. So I think it's important when we think about the considerations of whether users should be thinking about operating at the Fix, you've got a visible trading cost. Which is some type of brokerage fee that you'd have with your counterparty. But you also have to consider that implementation shortfall from the market impact. And obviously there was quite a lot of that through the COVID crisis earlier in the year.

Yeah. I mean what you're saying, I think is that there's a lot of concentration risk you get around that, that fixing period. Has that been intensified by the increase in use of passive funds amongst fund managers?

I think the most obvious examples that you get, David, are when you get large movements in equity markets and it can be exacerbated by passive funds, but it can also be exacerbated by rebalancing flows. So for example, when you have large equity market moves to the downside and as investors look at their hedging book, they'll need to rebalance their hedges. They'll need to sell their base currency and unwind some of their hedges that they've got with their foreign currencies. So from an Australian investor perspective, you see that come through, for example, during the height of the crisis in March. On March 13th the Australian dollar dropped about 2% in the hour before the Fix and that's in response to some pretty severe equity market moves in the prior two days. So you don't get this balanced fixing flow, you get quite an imbalance fixing flow and it has a significant market impact. And again, that's not coming into how Refinitiv calculates the Fix. It's really that observation of how users participate in that fixing window.

Okay. Mark, let me come on to you now. How do you see this? Do you think that the fixing in any way creates tensions between buy-side and sell-side in terms of what you're expected to do with execution?

Well, I think that the tensions, if there were any, if there were there or they still are, have decreased a lot. I think the improvements to the methodology and the communication and the education of the market, and releases of documents like FX Global Code have actually increased the awareness of the market. Most importantly from the buy-side, as well as the sell-side. We've kind of focused a little bit on the FX spot side of the Fix, but the swap side plays an equally, as some would say more important part of fixing for the buy-side.

And the testing for the markets through March, whilst it was unexpected in COVID and all the ramifications of COVID was an excellent example of how the market was going to treat itself as far as liquidity management and relying on a financial relationship for your liquidity can be tested in those times. I think for the most part the Fix operated quite effectively through March and that lends itself to give greater confidence to the buy side. And also, with a more efficient way of determining the Fix that lessens the pressure on the sell-side. So yes, I think whilst there's maybe always a natural tension from a buy and sell side, I think it's improved dramatically and the example through March was evidence of that.

Okay, I've got another question on that. But before that, we do have a poll result from that first poll. Which is, do you believe there are better methods to produce similar or better? Well, that's interesting. I've only just seen that as well. So that's something that we will take away and Shirley no doubt you and I will be talking about that. We'll be talking with our colleagues. Do you have any immediate reaction to that Shirley?

No, I think it's interesting. I guess what my immediate reaction would be to receive feedback on what would be considered an improvement. We're always looking to enhance. That's absolutely part of what we do. And that's what we're trying to do with the user groups and that way to engagement that we've been talking about as well. So we're always open to ideas, suggestions, feedback, and if there are different views then absolutely, no, please share them, that's what's important for us to get back feedback.

Yeah, it is, and we'll take that through. It's just one question that has come in, which covers a couple of topics actually. But it's somebody asking why an equity fund would wait two days to rebalance their FX risk just to be executing at the fixing. It seems counter-intuitive that's the question. Which is a question we haven't been asked before. In other words, basically, why would you run the FX risk when you're actually covering an equity risk on that?

Mark, can I come back to you if you've got any comments on that, please you can see the question there. Do you think, Mark, you mentioned the Global Code, which again, is a subject close to all of our hearts. Do you think over the period that we've seen since 2014 and during the period of formulating the principles of the Global Code, and of course the Code comes out of the 2014 report as well. Do you think there's been a major change in the way that the sell-side sees execution in terms of acting as an agent or a principle? And is that still a dynamic that is changing?

Well, the global code has done a lot of things. In principle eight, clarity on the manner in which you act, either as a principle or agent. It's given greater clarity, there has been an improvement in communication and the global code has served as, for one of a better word, as a vehicle of reference. It's heavily supported by the sell-side, as far as testimony and attesting to it. It needs to be greater attested by the buy-side, but that is improving, Stuart is doing some great work on that as well. So look, the market is for the most part principled, there is agency type execution. But it's really quite different than for the most part of a principle-based execution, which is for the most part Fix. So look yeah, I think the Global Code has done a lot of good work it continues to do so and the market's more informed.

Okay. And Stuart, I know that you've probably got a comment on the question relating to the bifurcation of the equity, liquid and FX risk.

Yeah, it is a good question actually and I'd say that the reason why often people use the Fix to rebalance might be just out of convention. Because their benchmarks that they might be following, they actually tend to rebalance at the end of the month. Which again, also leaves the investor way out of structure and unprotected to unintended risks through that period. But again, this goes back to that point of users really understanding the purpose of why they're using the Fix. If you're rebalancing your portfolio, if you're an investor who is out of structure, then you're better off actually trying to get back into the structure as soon as possible whenever there's a liquid market available to you. And the irony of that March 13th example that I used before; equities had sold off about 10% the prior two days. As people were rebalancing to unwind their hedges on March 13th, the equity market was roaring back at that same time and produced a huge upside return. So just as people were unwinding their hedges that were really setting themselves up to reinstate them the following day.

Yeah and that's a very interesting point. I mean, we all look now, I think at March particularly, as being a massive stress test for the market. I mean, we found out a lot about ourselves during that period and clearly here about the fixings. But what you're saying is really helping to paint the picture and thanks to the questioner for that question, because it does join up I think a couple of themes here. Why do people use it while they're fund managers? What are people caring about? They've got several risks to care about.

Let's move on to the next poll question and the next theme. This might've taken a long time to discuss a few months ago, but I think it's probably less of an issue now, maybe I'm wrong on this and that is the length of the fixing window

And here's the second and the last poll question. Do you believe that the five minute window is sufficient or should it be changed? Should you believe it should be shorter? Five minutes is fine, or would you prefer to see it longer?

Guy let come back to you on this one, I know that you agonised with Paul a little bit over this at the time. I'm not sure how I haven't been able to make a real judgement on this because very often I've heard people say, well, part of the problem is the window. If there are huge orders sitting out there that need pre-hedging, you can't get everything done in the space of the window, which also puts a question mark over pre-hedging. Where does it fit into the execution principles? Do we solve a problem by making it longer? Do we mitigate it by making it even five minutes? I'm not sure I know how to make a real judgement on this. What was going through your mind with Paul when you looked at that initially.

I know at least Mr Lambert who has got a question here will be certainly agitating for longer. To recall, we started off, with two (minutes), right? So that's where we were. So I was comfortable in answering this question seven years ago, which was, I believe it should be longer. So we were pretty confident longer than two was a desirable, just in terms of how much you were jamming into that a two minute window. And so five is longer than two, and it's a number which is round. But, I mean, we did actually think about 15 minutes and then another proposition and it comes to the question that Colin Lambert has asked, which is, do you need a different or parallel mechanism for those using the Fix as an execution method, rather than an evaluation method?

So, if you think about it from an execution side, then you could argue potentially it's a longer period, but from a valuation point, the further you move the valuation … It comes back to what Stuart was saying earlier, the further you move and widen the window, the less you may be trying to get, it's going to be useful to you as an evaluation tool. So that is something that you could think about.

I suppose, what we thought was we'll try five, five is longer than two. We'll see how that goes. And then it's an open question as to whether it should be longer and I'm pleased to read and hear from Shirley and reading the user group minutes, that's a question that the WM is actively considering as to whether it does need to be longer. It partly comes to Colin's question, what exactly is the purpose you're using to Fix for as to what the answer to that question is.

And just on pre-hedging, given you mentioned that topic that is indeed one of the issues we've got under review in the three year review of the Global Code, and we will be circulating a paper to the Foreign Exchange Committees possibly within the next 24 hours on that very topic, spelling out some of our thinking on it.

We look forward to seeing that. Mark, how do you feel about this issue on the length of the window? I mean, we were waiting with bated breath for Colin's question, which we get. We do know the debate around this. How do you feel about the issues?

Well if it's not broken, I don't think you need to fix it. I mean, it's something that was an estimate and a lot of thought went into it, but then maybe at the end of the determined, five, four, three, whatever it is, may be a little bit arbitrary, but it had to be longer. There's no doubt about that. And do you know how long, I think five, a great first step and there was going to be debate about it and that's essential because this title of this discussion is evolution, but I think for the most part, five minutes works and whether or not that's a minute less or a minute more that's in the range of something which is working, I think, reasonably effectively.

David mea culpa on my part and it's a question of memories dissipating with age here. So yes, as Paul Pepperbridge pointed out here, it was actually 60 seconds. It was 30 seconds prior to the hour and 30 seconds past the hour. So it wasn't two minutes, it was actually one. So yes, my bad or my bad memory on that one, so it went from one to five.

Yeah. It did. I mean, I think the original methodology, which obviously was inherited by what was then Thomson Reuters, and obviously now Refinitiv, was focused around that. Well, we'll get the results …

Here's the thing, David, the duration is one thing, but it's also very important that, the transparency around the fee associated with that and the fact that banks used to offer the service effectively free and there was a lot of pressure around that. And then, yes, extending the window was absolutely the right thing to do, but also the introduction of the expectation of a fee and to have that a global standard. And yes, of course that fee is going to change over time, but that is obviously a very important part of it.

Yeah. Well, it's also critical in respect to the agent versus principle discussion that the people have as well, because we're fitting several things into this window, which goes back to the point about, is it a reference rate? Is it a snapshot? Is it a benchmark? People do use it, I think in different ways, we'll get the result of that poll in a moment.

And we've only got a few minutes left. So let me move on to one other topic here. We have touched it, got close to it. We've got the results here. I hope everybody can see that. There's still a debate. I'm sure that Colin is somewhere in the blue there, but you're just a short head behind, I think, with your view, but it's a very, very interesting poll that one and I think it's very helpful to Shirley to have that.

And it tells us, I think that we need to keep our eye very, very carefully on this matter. It is a big issue and I think we probably need to say to ourselves at the moment, well, look, we have got, as Mark said, it's not broken, don't fix it at the moment, but I think it's something we need to keep ourselves very, very aware of in a changing situation, so thank you all for voting on that.

Let me just finish off then with a few words on the fixings for forwards an NDFs, Shirley, I'm right in saying really, that this has come into particular focus because of the changes in benchmark regulation and the forwards methodology and the NDF medic methodology is different. Do we feel that this has been working quite well since benchmark regulation changed? And I'll put that to you first, Shirley, and then maybe ask Mark and Stuart to comment on it afterwards.

Yes, happy to. So as you say, the WMR forwards and the WMR NDFs came into the regulatory scope from the beginning of this year. Fortunately, it's not really been a big shift from our perspective as an administrator, because we really had common practises that we used from the 4:00pm spot. And we had a broad application of those, whether there are policies or whether there are oversight committees and things. So it wasn't a big shift, but it was moving it into their line of vision. So it now is covered by oversight committees, for example. But I think there are significant differences between our current methodology for the forwards and NDFs versus the spot and inevitably really, given the different instruments that we are referring to. But it's interesting because it's definitely been a topic of conversation most recently, and we've had some really good dialogue around it at the user groups as well

And looking at how we can, you know, we're talking about evolution, how we can move the methodology forward and enhance that for these benchmarks. And I'm actually really pleased to see that from the discussions and the dialogue we have, we do have some enhancements in the pipeline. So from 2021, and there'll be further information coming on this because it will go to public consultation. But just to share some of the things that we are looking into, are things like decimal places with we've had some requests to move out the decimal places and increase their precision there for the forwards, looking at adding additional tenors, ceasing some particular tenors that are really illiquid. But more methodology focused, would be looking at introducing a calculation window. It's not something we have in the forwards. So there's going to be a lot of debate, I think, of what that contribution window to be and the length of it. So we welcome that as we move forward in process.

The other big piece has been around spreads. And I think certainly to your point earlier, event volatility, they're focused on forwards. I think that was a lot of movement in the spreads. So one of the things that we're looking at is how can we get more sophisticated about that? We had some really good dynamic mechanisms in the spots for the spread, and we're looking at how we leverage that and working as a say, with the users to gauge what the requirements are. Because we recognise forwards are obviously a different dataset than the spot. So there's a few things that are really active and hopefully during 2021 and the earlier part of 2021, we'll be able to bring these to fruition. But there'll be public consultations on these because obviously anything we change like this requires our users to have a voice as part of that.

I think there's a lot still going on. One of the things that we have felt and dialogue around, and we don't have the ultimate solution yet is around the data sourcing. So with the forwards, we have currently no transaction data as the data source. So there's no trading platform that we use for the forwards and that's principally because of the lack of liquidity of forwards on these platforms. So we had to look at it at very concentrated, in a really short timeframe, so the overnights, it's more [unclear 00:54:03], but really sparse after that, but not sufficient in order for us to use. And so we are still working out where could we get better sources of data? Is it different types of platforms we need to look to, do we need to be engaging more with the banks and understanding their challenges around providing data and compliance issues, et cetera. So this is an area that we welcome dialogue on, and it's still an area within the community.

Okay, well, that's really important. May I ask Stuart and then Mark to give us a quick reaction on that before we start to wrap up? Stuart, you particularly mentioned forwards early on as being very important to obviously the businesses that you're in.

They are important. I think similarly, to looking at the spot and the reason for executing there in the spot, we've identified that there are systematic patterns that take place because users tend to concentrate some of their execution into month end when it comes to forwards. So from our perspective, it's best to avoid it, especially that month end and I'm not talking about the determination of how that fix is calculated, but again, this is a behavioural issue and, and again, it gets down to thinking about what the purpose is and if the purpose is to try to mitigate trading costs, then we actively try to avoid rolling positions at month end when there tends to be a one way concentration.

Yeah. Interesting. And Mark, in terms of execution and in terms of the pricing then for forwards, how do you feel that this has been fitting in since the change in benchmark regulation? Are you comfortable with the way that this is landing?

Well, look, being non-executed fix is going to be fraught with, it's not perfect. It is evolving and Shirley, I thought described it very well. There is going to be continued debate around that. And so there will be questions raised. And I think it comes back to the point that Guy and Stuart mentioned at the start, is this appropriate for you? So this is for the individual buy-side participant to understand what the structure on how those non-executed forward points come about. It's not perfect. It is evolving and whether or not it's better for you - do you participate or do you go maintain a bilateral or multilateral relationship with other sell side participants? So I think that kind of folds it way into the original, what we talked about at the start of this discussion.

Okay. Well, I think that's a point too. Are there any final thoughts, Guy, that you have maybe on that before I wrap up?

No. Not for me, thanks David.

Well look, thanks to everybody who's dialled in. Thank you for the answers to the poll questions. I think we've got a great deal out of that hour. This is a real continuing work in progress, and it's a very dynamic process, and there's clearly a lot of lessons to learn. There's also a lot of contribution to make. So I'd like to thank Shirley, for joining us. You can go and have some breakfast now which is what I should be doing and also for explaining what you've been doing. And I've no doubt, this will not be the last time we do this.

You did particularly make a note of the user groups and we would certainly like to see more people amongst the user groups. So anybody who's dialling into this who would like to be on a user group, please let us know. Stuart, thanks for joining us and I look forward to speaking to you soon on our favourite subject of the Code and the buy-side.

Mark, very helpful to have your input and the discussions over the last few days and to you, Deputy Governor, thank you very much, indeed, for giving up your time. And if I may say so for probably being one of the people who started this whole business off. If it hadn't been for the work that you and Paul did seven years ago, I'm not sure we'd be here today.

So thank you to everybody and thanks to Refinitiv and ACI for putting it together. Have a good evening or good day, whichever is applicable to you.