MillTechFX joins the Association of Corporate Treasurers

MillTechFX has become a member of the Association of Corporate Treasurers (ACT), a leading body in the corporate treasury profession. We will be working with the ACT to highlight how businesses can overhaul FX execution to reduce costs, increase transparency and embrace digitization to improve operational efficiency.

Why it matters

Managing foreign currency exposure is one of the key strategic objectives of corporate treasurers. They must ensure currency risk is managed effectively, FX costs are consistently competitive and that their FX solution doesn’t impact liquidity.

Treasurers also want to embrace ‘future-proof’ technology, with the ability to automate and improve the operational efficiency of the finance function.

Solving the FX conundrum can help treasurers reduce costs, protect their business from currency movements, optimize cashflow and drive future success.

We believe corporate treasurers deserve better quality FX execution. They need a simple tech-enabled solution that cuts costs, reduces operational burden, and improves their FX workflow.

For a treasurer, going beyond aggregation and gaining actual access to the world of comparative multi-bank FX execution can be the first step towards supporting further international growth, adding real value to their business, and driving future success.

Go deeper

There can be a number of barriers to best execution – it can be an arduous task setting up FX trading lines with multiple banks and this means that many corporates still overpay for their FX.

Under MiFID II, best execution has been a requirement for investment firms for some time. They must take all sufficient steps to obtain the best possible result for the client. For too long it has been simply too difficult for most corporates to achieve this level of transparency.

In search of best execution

There are many factors to consider in the quest for best execution, but in our view the most important of those should be the best available price – in other words, the exchange rate at the point of trade. But achieving this isn’t simple:

• They are often reliant on a single bank or broker to meet their requirements, and FX best execution typically requires multiple FX counterparties.
• Many corporates are unable to access tier 1 FX liquidity and the best institutional-grade execution terms.
• It can be time consuming for a business to get set up with a new FX counterparty – sometimes taking anything up to a year or even longer - to open a facility with one bank. Getting set up with multiple FX counterparties simultaneously can be a highly inefficient process.

Lack of transparency → higher costs

FX costs are typically hidden in “the spread” –  the difference between the rate at which a market-maker bids to buy a currency pair versus where they offer to sell it. The transaction cost on any given trade can be calculated as the difference between the rate traded at and the mid-market rate at that point in time.

For example, if a corporate treasurer buys EUR 5,000,000 vs USD at 1.1890 and the mid-market rate at the time was 1.1860, the transaction cost on the trade would be 0.25%, or EUR 12,500. This is not an explicit cost as the treasurer won’t receive an invoice for this amount; rather, it’s a hidden implicit cost. Let’s make no mistake though: it’s just as much of a cost.

While transaction cost analysis (TCA) was created specifically to provide transparency on these hidden costs, many corporates still don’t have access to this kind of analysis.

“The elephant in the room is that dealers systematically and consistently overcharge clients who don’t have currency trading expertise.”

Research highlights that the fees corporates are charged to execute FX transactions are notoriously opaque:

• A 2019 paper from the European Central Bank found that banks were overcharging small corporate customers for FX services, charging hedging rates as much as 25 times higher than their bigger, more sophisticated customers.[2]
• Harald Hau, a professor at the Geneva School of Economics and Management, said at the time: “The elephant in the room is that dealers systematically and consistently overcharge clients who don’t have currency trading expertise.”[3]
• A study from Accourt on the same issue concluded that there is no straightforward way for a corporate treasurer to decide which one is the most expensive when comparing costs among banks.[4]

The bigger picture

Forward-thinking corporate treasurers could consider seeking out wholesale FX marketplaces that deliver full transparency at each stage of the execution process and offer real-time reporting and independent TCA, providing complete visibility of their FX execution costs and enabling them to demonstrate best execution.

How MillTechFX can help

The seemingly straightforward – but until now, elusive – premise of accessing competitive, executable quotes from multiple liquidity providers in real-time is critical for treasurers to gain a transparent view of their execution setup, enabling them to streamline their operational workflows and execute FX trades at the best possible rate.

Simple aggregation may not be enough – treasurers should be able to execute on these prices and have banks compete for their business. Some platforms aggregate prices from multiple banks but still require a treasurer to go through the operational nightmare of negotiating ISDA agreements with each counterparty to transact with them on the platform. For many corporates, this remains an insurmountable barrier to entry.

This is now possible thanks to MillTechFX.

Find out how much you are spending on your FX execution and how much you could save with MillTechFX with a free TCA here.

 

[1] https://www.ft.com/content/9e8f9248-8d1a-11e9-a24d-b42f641eca37

[2] http://www.haraldhau.com/wp-content/uploads/FX_PriceDiscrimination_in_FX_OTC_markets.pdf

[3] https://www.ft.com/content/9e8f9248-8d1a-11e9-a24d-b42f641eca37

[4] https://www.pymnts.com/news/b2b-payments/2016/banks-spike-sme-cross-border-payment-fees-says-research/