To fix or not to fix: The representativeness of the WM/R methodology that underpins the FX benchmark rates. A pre-registered report

This paper examines the effectiveness of the WM/Reuters (WM/R) methodology for FX benchmark rates since its revision in 2015. After a series of market manipulation scandals, the WM/R methodology underwent significant changes to enhance its reliability and minimise the risk of market manipulation. However, the dynamic nature of the FX market, characterised by evolving investor behaviour and continuous trading, necessitates a reassessment of this benchmark’s quality. Using a comprehensive dataset of proprietary order book data from Refinitiv, our empirical study critically evaluates the WM/R methodology’s current standing in the FX market. We focus on representativeness, attainability, and robustness to determine whether lengthening the time window of the benchmark increases its reliability. We then focus on liquidity, trading activity, transaction costs, and price volatility to determine the ability of the WM/R methodology to minimise market impact during the 4 pm calculation window. Our findings aim to inform future modifications to the FX benchmark, ensuring its alignment with the evolving market environment and maintaining its role as a crucial reference point for global financial activities. This study contributes to the ongoing discourse on effective financial benchmarking, particularly in the high-stakes and continuously active realm of foreign exchange markets.