WM/Reuters Benchmark Rates

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DEFINITION

Spot and forward foreign exchange rates that are used as standard rates for portfolio valuation and performance measurement. The WM/Reuters benchmark rates are provided by State Street subsidiary the WM Company and Thomson Reuters. The WM/Reuters Closing Spot Rate service was introduced in 1994 to prove standard forex rates that would enable portfolio valuations to be compared more accurately against each other and financial benchmarks, without having to account for currency differentials.

INVESTOPEDIA EXPLAINS

The original WM/Reuters service provided closing spot rates for 40 currencies daily; the service has since expanded to 159 closing spot currencies covered on an hourly basis. In addition, WM/Reuters also provides closing rates for currency forwards and non-deliverable forwards (NDF), hourly intraday for spot, forward and NDF rates, as well as historical data.

While most major equity and bond index compilers use the WM/Reuters benchmark rates in their calculations, the rates are also used for other purposes such as benchmark rates for the settlement of financial derivatives. Some banks also provide a service to their clients by providing a guarantee to trade at the WM/Reuters rates.

The WM/Reuters benchmark rates are determined over a one-minute fix period, from 30 seconds before to 30 seconds after the time of the fix, which is generally 4 pm in London. During this one-minute window, bid and offer rates from the order matching system and actual trades executed are captured. Since trades occur in milliseconds, only a sample is captured, rather than every trade. The median bid and offer are calculated using valid rates over the fix period, and the mid-rate is then calculated from them.

The importance of these rates lies in the fact that they are used to value trillions of dollars in investments held by money managers and pension funds. In 2013, the method of fixing the WM/Benchmark rates came under intense scrutiny, after widespread allegations of collusion and rate manipulation by traders surfaced.


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