We highlight some of the costs associated with FX execution and hedging that fund managers should be aware of and rank them in order of transparency.
SEC private fund overhaul highlights importance of transparency
8 September 2023
On the 23rd of August, the Securities and Exchange Commission (SEC) adopted new rules that aim to bring more transparency to the $20 trillion private fund industry.
The changes, which mark the biggest overhaul of the private fund industry rules since the implementation of the Dodd-Frank Act in 2010, will shine a light on private equity and hedge fund expenses and fees.
Private funds are now required to issue quarterly fee and performance reports and to disclose certain fee structures while barring giving some investors preferred treatment. They also require funds to perform annual audits.
These requirements will aim to increase transparency, fairness and accountability in the rapidly growing private funds industry.
SEC Chair Gary Gensler told reporters after the panel's vote, "Investors, large or small, benefit from greater transparency, competition and integrity.”
Parallels with the FX market
This is a positive move to bring fairness, equality and transparency to an industry that has been skewed towards the biggest players and suffered with opacity for years.
There are parallels with the foreign exchange industry too. Many corporates and asset managers continue to significantly overpay for their currency execution and hedging requirements.
This is because of two long-standing problems that they typically face when it comes to FX.
1. Lack of transparency - Transaction costs can be hidden in the FX spread, typically calculated as the difference between the traded rate at the point of execution and the mid-market rate at that time. Moreover, corporates and fund managers tend to only work with a small number of counterparties for their FX due to the operational complexity of setting up multiple banking relationships, making it harder for them to compare prices.
2. Inconsistent pricing - Banks and brokers reserve their most competitive rates for institutions that transact the highest volumes, meaning small and mid-sized asset managers and corporates often struggle to get the best possible deal. This is no secret. The European Central Bank produced a reportin 2019 that found that banks were overcharging their smaller corporate customers for FX services with hedging rates as much as 25 times higher than for their larger clients.
The FX Global Code
In a bid to bring more transparency to the FX market and tackle the issues above, the BIS Foreign Exchange Working Group published the FX Global Code of Conduct on the 25th of May 2017. It aims to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange (FX) market.
It is a set of global principles of good practice in the FX market, covering ethics, governance, execution, information sharing, risk management and compliance as well as confirmation and settlement.
The FX Global Code has largely been adopted and driven by the sell-side. Banks have agreed upon standard practices and helped drive out controversial practices such as last look.
But it hasn’t had the same success with buy-side firms and corporates, many of whom don’t know of its existence. It’s vital that we keep working together as an industry to promote fairness, equality and transparency and encourage adoption of the FX Global Code.
How MillTechFX is bringing transparency to FX
MillTechFX is levelling the playing field for mid-sized corporates and fund managers by digitising the FX process from initial price discovery right through to reporting at the end of the trade lifecycle, ensuring total transparency. The benefits of this include:
- Easy and quick onboarding – Rather than spending months (even years) setting up multiple FX facilities with different counterparties, firms can sign up to MillTechFX’s multi-bank marketplace and transact within weeks with multiple counterparty banks.
- Best execution and hedging management – Firms benefit from multi-bank access without having to manage multiple relationships and processes. Firms can transparently compare and execute FX rates from multiple providers on a single marketplace and ensure best execution with a simple click of a button.
- Cost savings - This model has been proven to save clients up to 70% on their execution costs.
- Transparency – MillTechFX offers a fixed fee service, including third-party Transaction Cost Analysis (TCA) to ensure total cost transparency.
MillTechFX is enabling its clients to have access to live rates from multiple banks and execute at the best rate available from its counterparty banks, all whilst reducing the operational burden traditionally associated with this kind of market access.
If you’re interested in learning more about MillTechFX and our commitment to best practice, get in touch today.