Foreign Exchange Benchmarking
- How much are you paying your counterparty?
Key topic for
Investment Managers, Treasurers & Audit Committees.
more info: click here
Institutions rely on their global custodians and other counterparties 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 acceptable for your custodian or other counterparty 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?
Is there clear transparency on the counterparties' margin and are these earnings routinely advised to you? Do you have a mechanism for monitoring the competitiveness
of the foreign exchange rates you are receiving?
Our recent experience with European-based collective investment funds suggests that foreign exchange spreads
vary 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
100 fund managers and pension funds. The FX order flow they benchmark is
well over $100 billion
per annum and the analysis shows that the implied cost per FX trade undertaken
averaged $1,145 and that the spread taken averaged 12.6 basis points.
Compare this with a 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 fees
from that counterparty.
Monitoring program
Through our partnership
with specialist
Amaces, Sondent can provide FX monitoring services that help to
ensure that the FX rates applied are fair, competitive
and transparent ; that is, all earnings accruing from
FX transactions are fully disclosed to you.
.
