How term fixings can be as robust as the underlying overnight fixing rates
Mandated demand at the auction
FAIRFix’s derivative obligation mandates a non-competitive order for every derivative that references the FAIRFix benchmark. This in turn, guarantees that notional amount of transactions at the auction matches the notional amount of derivatives that reference the benchmark. And so a LIBOR-like inverted pyramid (where the notional of derivatives referencing LIBOR greatly outnumbers the notional of underlying transactions in the fixing) will not develop.
FAIRFix fixing rate equal to the FAIRFix auction transacted rate
FAIRFix is designed so that all non-competitive orders are guaranteed to transact in the auction at a single rate (determined by a Modified Dutch Auction methodology). This auction transacted rate is defined to be the FAIRFix fixing rate and so parties are able to switch seamlessly between exposure to the FAIRFix fixings and exposure to the compounded overnight realised rate, by simply submitting a non-competitive order into the auction. This ensures that the FAIRFix fixings and the overnight fixings are economically equivalent and therefore that the FAIRFix fixings are underpinned by the same notional of transactions as the overnight fixings.
Conflicts of interest removed from the fixing process
FAIRFix’s derivative obligation also ensures that sell-side institutions that enter into FAIRFix derivative contracts (with their customers) neutralise their resultant fixing exposures. Furthermore, all FAIRFix market makers that have any exposure to the FAIRFix fixings (however derived) must submit neutralising non-competitive orders into the auction before being permitted to submit any competitive orders. This removes any conflicts of interest from the competitive side of the auction enhancing the representativeness and robustness of the resulting fixing rate.