Only months into an overhaul of financial benchmarks at the center of market manipulation allegations, traders and investors have raised concerns over whether new rules will work and big banks will have too much influence.
Global regulators started to map out rules aimed at making hundreds of financial benchmarks, from interbank lending to commodities, more transparent and more inclusive after the Libor interest rate-rigging scandal broke in 2012.
In the $5 trillion-a-day currency market, regulators plan to extend the one-minute window used to set benchmarks to five minutes in an attempt to make it harder to manipulate prices.
But some traders and investors say the additional exposure, risks and costs associated with the longer window will lead to smaller banks withdrawing from the "fixing" process, leaving a few big banks executing the bulk of orders.
Similar concerns have been raised in the precious metals markets, where some reform has already taken place. Some market participants say the steep cost of satisfying extra layers of compliance could squeeze out smaller players.
The overhaul in bullion markets has so far spawned an electronic pricing mechanism for silver prices, ending a century-old manual process. But customers of participating banks complain they now do not have the ability to change their order during the process because the technology does not allow it, for now.
"I used to use the fix all the time and I don't use it any more under the new rules," one largecommodity fund manager told Reuters, speaking on condition of anonymity about the new silver fixing as they are not authorized to speak publicly.
"I can place an order 30 seconds before the benchmark price starts but once the process starts, I can't cancel it, I can't change it, I can't add to it."
"The regulators have ruined it and the people they are trying to protect and make it better for, they have made it worse for them," said the manager, who has resorted instead to trading using spot market prices.
Global regulator the Financial Stability Board (FSB) declined to comment.
British regulator the Financial Conduct Authority said the shape of the reforms for various benchmarks - including for currency markets and commodities - had been led by the market, with banks and other industry players involved in the process.
FINES
The row over benchmarks used to set values for thousands of contracts and assets worldwide began in 2008 with the first allegations that banks manipulated wholesale Libor rates, the London interbank offered rate that is used as a reference point for pricing roughly $450 trillion of financial contracts, from derivatives to credit-card loans.
After regulators started slapping billions of dollars worth of fines on banks for their roles in the scandal in 2012, and prosecutors started charging individuals, Britain announced in September it would extend laws criminalizing the rigging of Libor to seven other benchmarks by the end of the year.
Allegations of misconduct and abuse differ according to each market but broadly center on the misuse of influence and market information by some of the biggest financial institutions.
Banks - already the subject of public and political anger for their role in a financial crisis that triggered a near-global recession - are desperate to head off further damage to their reputations, which they fear could lead to more aggressive and costly regulatory changes and further fines.
In the foreign exchange row, nothing has been proven and no-one has yet been charged but banks worldwide have since let go or suspended more than 30 traders.
An FSB report on currency market reform is still to go before the G20, but proposals made in September after consulting major banks and funds - including the longer window - are attracting criticism on London trading floors.
London is the hub of the global currency market, accounting for about 40 percent of the money traded on an average day.
The key benchmark, the WM/Reuters fix, relates to several exchange rates and is compiled using data from Thomson Reuters and other providers. They are calculated by WM, a unit of State Street Corp. Thomson Reuters is the parent of Reuters News, which is not involved in the fixing process.
RISK
Banks refuse to be drawn publicly on the implications of the FSB recommendations for business relationships with the large fund investors who make most use of the daily "fixings".
But more than half a dozen bankers involved with providing the service have told Reuters privately that smaller banks would be likely either to refuse to accept orders or pass them on to larger lenders, given the additional cost and risks involved.
"It's becoming fairly clear that no-one will want to do it, so the business will graduate to the big banks," said a senior dealer with one mid-sized currency trading bank.
The bankers declined to be named because they are not authorized to speak publicly.
FX fixing orders ask banks ahead of time to guarantee they will do a transaction for a client at a then-unknown price. Dealers say the danger of an event that radically changes prices in a five-minute window is exponentially larger than with a one-minute window when there is little time for the market to move.
"A lot of people are looking at the risks involved in the five-minute window and going: 'How am I going to wear that?'," another dealer said. "It feels like these changes have not involved anyone who has ever actually had to execute one of these orders."
Another issue, traders say, is the recommendations made by the FSB that fixing orders be executed by separate desks away from banks' existing teams of spot traders.
Many are still puzzling over how this system will deal with risk around orders that a bank has not been able to match off against other banks with similar orders in the target currency.
But they say the cost involved in creating new teams may prove prohibitive for senior bank managers who have been slashing staffing and costs since 2008.
"Banks are going to be asked to find additional people, additional resources at a time when they're trying to do the opposite," said a dealer at another bank outside the market's top six but inside its top 20 players by volume.
"In many cases this (fixing) business is at best irregular, some days you'll have orders but certainly not every day, so we'll quickly wind up with a situation where we will just do deals to pass the quotes to the bigger banks."
SILVER TEETHING PAINS
When watchdogs started imposing fines related to the handling of benchmarks, banks involved with several of the commodity world's fixings considered pulling out, judging the cost of running them outweighed revenue generated.
Reform in precious metal benchmarks started after Deutsche Bank said in January it would withdraw from the gold and silver fixes after two decades, citing scrutiny from regulators.
The Chicago Mercantile Exchange (CME), jointly with Thomson Reuters, took over administration of the silver benchmark in August after just five weeks of consultation with the industry and regulators. There are currently five banks putting orders through the new mechanism.
"The EU has reserved the power to compel banks to participate in what it defines as a critical benchmark, but that is clearly not what anybody wants," said John Cooley, global head of indices and reference rates at Thomson Reuters.
"We will continue to work with the banks, the regulators and benchmark administrators around the world to ensure the integrity of our industry's most important benchmarks."
CME global head of precious metals Harriet Hunnable said no one would have chosen to deliver a new system in such a short time frame. "We are responsive to what the market need, but we can't change what the regulators want," she added.
The London Metal Exchange, owned by Hong Kong Exchanges and Clearing Ltd will run the platinum and palladium fixes from December. And five companies are battling to provide a global benchmark for gold, whose over-the-counter market is worth around $200 billion a day.
