FX platforms: the hidden face of the moon
Best pricing, but which one?
A lot of treasurers are convinced that the best possible way to get excellent FX pricing, if not the best, is to use a “classic” FX aggregator. Is it a true statement? Indeed, on a so-called FX platform (I would suggest "FX aggregator") you have the best price among your preselected banks and among pricing offered by them. But does it mean you have the cheapest possible price? Of course not.
Are you sure you have the best execution? By dealing with classic FX platforms, corporates limit their counterparties to their usual core banks. They have no access to other banks and therefore miss opportunity to get access to potentially more competitive pricing from other financial institutions. These other banks do not know your usual positions (i.e. is the company “long” or “short” in certain currencies?). They should be more competitive and narrow spreads to have a chance to get a deal. I guess it may be time after the COVID to reconsider the way we deal foreign exchange instruments. It may be time to potentially analyze whether you could reduce your costs of hedging by getting access for free to better pricing on another platform interfaceable to your ERP or TMS. I do believe the few major players having a dominant position are able to apply margins to FX deals, which make this business profitable for them and for banks. The hedging costs having slightly increased over time and we should contemplate solution if any (and there are some) to reduce costs, enhance execution and enlarge range of counterparties (including banks you do not work with yet).
Pricing transparency is often lacking
The transparency on pricing is often lacking. Who could claim he/she has access to the best prices? The best of a pre-defined pool, but not the best in the absolute, I am afraid. Therefore, I think it deserves to be further analyzed and benchmarked, potentially by a third party (could be free) to assess the potential savings. Few pips on billions of USD equivalent transactions could make huge savings. No CFO on earth these days would refuse, isn’t it? Have you seen a “Transaction Cost Analysis” report testifying you got the best execution from your current FX platform? I guess not. Therefore, you have a problem. Who could contest that reporting offered by classic platforms is rather poor and not useful? FX reporting is in general poor, not comprehensive enough and not easily useable to feed dashboards. I would be pleased to know precisely what my bank counterparty and the platform in between took as margins. Pricing of customers made by banks (even on platforms) are tiered according to prescribed set of criteria (i.e. credit worthiness, on-boarding complexities, annual FX volumes dealt, type of business, types of products, etc…). Once classified, a fee is levied to each customer in the form of a spread around the mid-market price to compensate the bank for the risks involved in making a market although this often remains opaque.
This opacity is distorting the game and hiding margins. Some interesting sources like IMF research or Russell Investment researches underlined these excessive costs being charged. The number of participants and sizes help offering large scope of counterparties. Fortunately, some disruptors are coming and proposing alternative solutions. It is the reason why an in-depth analysis to compare actual execution prices with mid-market rate at the time of the trade and measure the extent of any slippage or margin versus the best execution pricing. Eventually, the current crisis gives us a fantastic opportunity to revamp our FX execution processes to search for savings (if possible) and reduction of spreads and charges.
Independent providers (like MillTech FX) can offer access to more counterparties than treasurers likely have (i.e. not only their core banks but all others) and likely better pricing due to the large flows they trade with the banks.
Testing such disruptive platforms may give you an occasion to generate significant savings. At least, why not checking the real potential benefits of adopting a new generation platform? It is not rushing in anything and has no cost. I am convinced you will be positively surprised by the excess costs you are paying while being sure you get the best ones.
François Masquelier – SimplyTREASURY
Quotation: “Testing such disruptive platforms may give you an occasion to generate significant savings.”