Sondent Group, LLC

In partnership with Amaces of the UK, we have developed a comprehensive benchmarking service which provides assurance that your fund's foreign exchange ("FX") transaction costs are reasonable.

A Key Topic for Treasurers and Audit Committees

US Mutual and pension funds rely on their global custodians to safe-keep and settle assets in foreign markets around the world. An important part of this service includes converting foreign currency proceeds from settlements and corporate action events.

It’s certainly ok for your custodian to earn a spread on these foreign exchange transactions, but how do you know that the conversion rates being applied to your funds are market-competitive? Does your Fund advisor have a mechanism for monitoring the competitiveness of these foreign exchange rates? Are your custodian’s foreign exchange earnings fully disclosed to your board on a periodic basis?

US Mutual Funds could be getting a raw deal on foreign exchange (“FX”) transactions if the Fund’s advisor or audit committee doesn’t have a process to review and monitor those transactions on a regular basis. Recent experience with foreign based collective funds, suggests that foreign exchange spreads charged by custodians varies considerably by market and even by client and by transaction type. In the latter case, FX transactions carried out under a so-called ‘standing instruction’, for example foreign dividends, often fare the most poorly in terms of the exchange rate applied.

The amounts of money involved can be very significant. Our partner in Europe already monitors performance for over 80 fund managers and pension funds. The FX order flow they benchmark is over $100 billion per annum and the analysis shows that the implied cost per FX trade undertaken by the custodian was $1,145 and that the spread taken by the banks averaged 12.6 basis points (but with best in class at 3 basis points and worst at 44 basis points). One large fund had an “opportunity loss” or performance drag of just over $21 million pa, which was significantly greater than the disclosed custody fees.

Monitoring program

Through our partnership, Sondent can provide FX monitoring services that help to assure Advisors and Trustees that the FX rates applied are fair and competitive with the market and that all earnings accruing from FX transactions are fully disclosed.

A typical program is straightforward to set up. The fund’s custodian is requested to provide all FX transaction data to us on a confidential basis for inclusion in the monitoring program. We have already established data links to all of the major custodians.

The Fund’s FX trades are initially compared to market highs and lows of that day in that currency pair. We then compare your Fund’s FX rates with the FX experience that custodians give your peer group, and provide reports on a range of parameters, including:

* Summary for the reporting period

*Comparisons to market and peers by size of FX deal and by type of FX currency cross
* Cumulative performance and trends over time
* The implied or hidden costs of your FX order flow
* Significant outlier trades and the “excess” cost per FX deal
    

Please contact us for a confidential discussion on how we could assist you.