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How fund managers can keep FX costs down

How fund managers can keep FX costs down

Best Execution
Transaction Cost Analysis
FX costs
Institutional investors
Joe Mc Kenna Mini

Posted by Joe McKenna at MilltechFX

'5 min

26 January 2022

26 January 2022

Comparison websites are all the rage and it's easy to understand why. In a sea of choice for home insurance, holidays, TVs, there is often little to differentiate one from the other. When products and services become highly commoditised, often the deciding factor for the consumer is price or cost. If there isn’t much to differentiate between multiple purchase options in terms of the product or service that’s delivered, why would you pay more?

Fund managers are often spoiled for choice when weighing up service providers such as banking partners, subscription line lenders and fund administrators, meaning decisions are often made on fine margins.

Unnecessary costs should be avoided (at all costs!) because investors expect that every single Pound, Euro or Dollar generates a return and partners are aiming to surpass their performance hurdle.

Both investors and partners have significant skin in the game, so when they kick the tires and look under the bonnet of the finance function, they might expect a rigorous audit trail of how costs are being managed and objective decisions are made.

This seems straightforward enough – manage and monitor costs to help maximise returns, who wouldn’t do that? It turns out that a large percentage of the investment community cannot convey explicitly what their annual FX costs are.

Managing FX costs

FX is highly commoditised – a US Dollar is a US Dollar whichever bank you buy it from – so assuming certain basic delivery and service standards are met, price, or the most competitive exchange rate, wins most of the time.

Fund managers also have a fiduciary responsibility to pursue best execution for their clients so they must have multiple FX counterparties at their disposal every time they enter the market to execute a trade. This means they’ll need to consider the number and quality of FX counterparties competing for trades. When a fund manager implements an FX policy, they should also take into account the following:

     1. If notional / credit thresholds are of sufficient size

     2. The credit terms of the facility are in line with their liquidity profile

     3. If trade tenors match their desired hedging strategy

At MillTechFX, we speak with CFOs and COOs daily and whilst they can all articulate their FX strategy, best performing counterparties and associated credit limits, few can they say with certainty what their costs are explicitly, and relative to what may have been agreed upfront.

FX costs are usually hidden as an all-in rate which is discounted from the mid. However, it can be hard for fund managers to identify where the mid is and therefore calculate what their costs are on a trade-by-trade basis.

Let's not forget that post the 2008 Global Financial Crisis, a series of high-profile lawsuits were filed by pension funds against their custody banks, claiming that the banks had charged excessive fees for FX trades, deriving from a lack of transparency around when trades were being executed and the mid at that time.

Monitoring FX costs

Fund managers can always check what they’re being charged on FX transactions by conducting regular Transaction Cost Analysis (TCA).

TCA goes hand-in-hand with best execution and can be used as an ongoing audit of FX practices as well as hold existing FX counterparties to account.

One major goal of TCA is to gain oversight of trading costs, but additionally it helps to comply with best execution policy, regulation and  strong governance expectations from investors and internal stakeholders.

Nothing revolutionary here:

      1. Find FX counterparties that can meet your requirements

      2. Compare pricing on a trade-by-trade basis

      3. Capture trade data for regular, post-execution cost analysis i.e. TCA

However, these straightforward steps are often overlooked.

A recent survey titled ‘The Grey Costs of FX’ drew feedback from various FX industry specialists – 45% were investors, 25% asset owners and 20% either banks or brokers. It found that 39% of the industry is not tracking any TCA for FX.[i]

Why might that be?

A lot of the market still use manual processes to compare pricing, execute trades, and reconcile trade information - namely trade timestamps - which are sometimes not reported accurately by their FX counterparties.

For many fund managers, FX is a non-core business activity so they commonly get set up with a handful of FX counterparties, with the hope that increased competition bypasses the need to agree upfront costs and monitor them on an ongoing basis – this simply isn’t the case.

However, it is important to remember that TCA typically comes with its own costs so fund managers could explore selecting an FX partner that has TCA built into their offering. Fund managers should check that any offer of TCA is carried out by an independent provider who can assess trade costs  in an unbiased manner.

What do I need for TCA?

To perform a TCA, historical trade data is required:

  • Currency pair
  • Nominal trade volumes
  • Product (spot, forward etc)
  • Trade date and value date of the trade
  • Time stamps
  • Direction i.e. buy/sell
  • Executed rates

To calculate the transaction cost on a trade, the actual rate the trade was executed at is compared to an independent mid-market rate at the time of execution.

What does a TCA show?

  • The cost on a trade by trade basis or the total portfolio cost of a dataset
  • Cost inconsistencies across product, currency pair, tenor and counterparty
  • Evidence of best execution

Ongoing, quarterly TCA analysis can also be embedded to ensure consistent FX execution performance.

How MillTechFX can help

MillTechFX by Millennium Global is the FinTech affiliate of Millennium Global Investments, one of the largest specialist currency managers globally. Our multi-bank marketplace helps institutional investors and managers significantly reduce both FX costs and operational burden associated with FX execution and rolling hedging requirements.  

We provide an end-to-end solution, from onboarding with 10+ counterparty banks to execution, settlement and reporting of FX transactions, including TCA, across multiple funds.

To speak to us please contact us here.

 Read more here from our Joe McKenna Blog series.



  • This document, including the information provided herein, is provided for information purposes only and does not constitute an invitation or offer to subscribe to or purchase any of the products or services mentioned.
  • The information contained is intended for Professional Clients (or elective professional clients only). MillTechFX does not target retail clients as the products offered by MillTechFX are not suitable for, or made available to retail clients.
  • The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should consult your investment, tax, legal accounting or other advisors.

[i] ‘The Grey Costs of FX – How far to true best execution’ July 2021 - prepared by ValueExchange and HD Financial Consulting, sponsored by NAB and Lumint with the support of NewChangeFX and ACI.

URN: MT100138

Joe Mc Kenna Mini

Joe McKenna, Head of Institutional Solutions

Joe has over 15 years of experience working in FX markets and has held various senior positions both in the UK and overseas. Most recently, Joe was on the Investec Fund Solutions team, helping fund managers with bespoke lending and derivative solutions, covering each stage of the fund lifecycle and multiple layers of the capital structure.

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