Many buy-side firms have no visibility on FX costs, study finds

The 'hidden costs' of FX are growing by the day, yet most firms have outsourced TCA.

Buy-side firms are not tracking FX execution quality and more than half are overlooking more than 70% of their FX costs, new research from the National Australia Bank (NAB) and the ACI shows.

The survey of global banks, brokers and investors found that 39% of buy-side firms don’t track FX execution quality including 27% of fund managers, 31% of equities managers, and 44% of fixed income managers. The findings were published in a report titled, The Grey Costs of FX: How far to true best execution?

It found that 55% of the industry is overlooking 75% of its FX costs, which includes not only execution costs and spreads, but also capital/treasury impact, regulatory development costs, liquidity impact, staffing and IT systems costs. These ‘hidden costs’ of FX, the report stated, are growing by the day, with staffing costs increasing by more than 12% in North America and 10% in Asia Pacific.

Of those firms that do conduct Transaction Cost Analysis (TCA) on their FX trades, the report found that 26% do it in-house using a single timestamp, another 10% use the same method, but have outsourced it to a third party, and 25% use multiple time stamps.

“Many buy-side firms rely on bilateral relationships with an FX broker and so don’t have access to rates from multiple providers, meaning they have no visibility on whether they are getting a good deal,” said Eric Huttman, CEO of MillTechFX, a FinTech set up by Millennium Global, a specialist currency manager with $20 billion in assets under management. “As a result, they struggle to achieve best execution and are significantly overpaying for FX.” According to Huttman, this problem disproportionately affects mid-sized asset managers.

While TCA is a core competency of banks, the NAB and ACI survey found that 54% of fund managers had outsourced the function. But Huttman said it’s worth remembering that fund managers are fiduciaries.

“They are responsible for their investors’ money, which brings with it the duty to put into place best practices for transparency. The trouble is that FX has been notorious for its lack of transparency. This is thankfully now starting to change though.”

Huttman said the FX Global Code provides a global framework for good practice and processes around transparency, but many firms who are trading in FX not to speculate, but to hedge or simply buy foreign currency for a payment or investment, are simply not set up in a way that makes following the FX Global Code’s framework feasible.

Millennium Global launched MillTechFX to enable asset managers to access vastly preferential rates from 10+ banks by harnessing its vast purchasing power, enabling best execution. It has been in build mode for the last year and is now expanding into Europe, having already set up operations in the US and the UK.

Tracking FX costs is more than just complying with regulatory requirements, the study concluded, pointing to other performance-driven benefits from greater cost clarity, including competitive differentiation and yield enhancement.