On October 2, the Federal Reserve Bank of New York announced that it will stop its long-term practice of publishing a daily 10:00am and noon FX “fixing” rate at the end of 2008.
According to the NY Fed (FRB) website, there’s simply no need for this additional benchmark: “There are many alternative, market-based sources for these rates” (for more, see www.ny.frb.org).
The October announcement caught people by surprise: while not irreplaceable, the imminent disappearance of this independent reference rate was not welcome news. I like the idea of using the 10am fixing. I would hate for that to disappear,” noted one FX manager.
LOOKING FOR ALTERNATIVES
While there are clearly plenty of alternative rate-setting mechanisms around, the FRB rate has been a trusted source of data for many treasuries and for two very good reasons:
1) The rate was set by an objective (government) party and could be verified by auditors, independently; and
2) The rate reflected the actual, intra-day liquidity and price.
The FRB’s 10:00am and noon rates disappearance will force treasuries that had built processes around the rates to alter their practices, rewrite policies and procedures and find a new, trusted source of price data.
Identify an objective and actionable rate. A member of the NeuGroup’s FX Risk Managers’ Peer Group noted that his company had been relying on the noon rate to set month-end accounting rates.
“We prefer these [the FRB’s] fixing rates over [the rates in the] WSJ or Bloomberg end-of-day rates because they are fixed during liquid market hours. Closing rates tend to be harder to match as they occur at illiquid times at the close of the day,” he said.
Update policies and procedures. Once an alternative is chosen, treasury would have to change its policies and procedures to accommodate the new choice; plus, often the use of the FRB rates has permeated other areas of the company, beyond the setting of month-end rates, for example. One practitioner reported his company uses the same rates for setting budget/planning rates in other areas of the business. Thus, any alternative must serve both needs.
Ensure it’s fed “straight through.” For most companies, regardless of the ultimate choice of the FRB rate replacement, the new reference rate would have to be fed via the existing Bloomberg system to interface with existing applications and processes. “We get feeds from Bloomberg today, and expect to continue to use Bloomberg with the new source of information. We will not select a source that cannot be fed to Bloomberg,” explained one FX manager.
Seek consistency. Ideally, the new rate should resemble the “old” rate so that companies can compare apples to apples when looking back at historic data. One company noted it’s considering replacing the Fed’s rate with the rates published daily by the Bank of England, which are available via Bloomberg around 8am PDT (known in Bloomberg as “UK Spot Close $”).
However, a potential hurdle may be getting FX rates on less-liquid currencies because the BofE publishes some currencies’ closing rates—e.g., Korean won and Thai baht—with a one-day delay.
Ensure auditors like it. According to another FX manager, one other solution could be to use commercial bank-provided fixing rates; however, “we have wanted to stick with an independent, government entity that our auditors can verify on their own. The Fed rates are best for us today,” the FX manager lamented.