The costs of day to day FX management have been tackled in a new report from investment consultant Bfinance.
The report, Tackling Hidden Costs in FX Management, seeks to identify where investors are spending money, and where they could save it within the FX management processes currently being followed.
Key points identified through the reserach include:
Asset owners - whether they engage in FX trading through asset managers, custodians or direct trading - should be aware of the meaningful performance erosion arising from visible and invisible costs including spreads, fees and market impact.
Transaction Cost Analysis can be helpful in achieving proper visibility and governance of these costs, and determining how to manage them. Yet many forms of TCA do not reach an appropriately high standard due, for instance, to the use of non-independent rates for benchmarking.
Once proper visibility is achieved, investors can consider how to address the challenge. Approaches may include refining manager selection, reducing the amount of FX trading done via custodians and more. We note a recent proliferation of "peer-to-peer " netting solutions and urge investors to consider these with care. The potential savings are meaningful, but maximising the benefit depends on the rates used, the rules applied and the range of ways in which netting can be plugged into existing processes.
To read the full report, click on the pdf below: