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.
The quick guide for Global Businesses to beat inflation with alternative FX solutions
6 July 2022
Inflation has seemingly become the word of the day, reaching a 40 year high of 9% in the UK in June. Meanwhile, the IMF has reduced its forecast for UK economic growth in 2022 from 4.7% to 3.7% in recognition of higher operating costs.
Furthermore, rising volatility due to geopolitical events and disruption to global trade and supply lines are making it difficult for companies to effectively manage their FX risk.
All of these factors mean that senior finance department decision-makers are on an efficiency drive, forcing a rethink of traditional processes and relationships in search for savings.
Navigating the hidden costs in the FX market
The first stop on this search for savings should be the easiest to tackle: foreign exchange (FX) transaction costs. Corporates and Global Businesses continue to overpay for their FX requirements and suffer from a lack of transparency. There are essentially two main problems that businesses face when it comes to FX, which remains a frustratingly opaque market:
1. Lack of transparency
Transaction costs are 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. This is something that is easy to calculate through Transaction Cost Analysis, but all too often firms don’t even know this is possible. This lack of transparency is compounded by the fact that corporates tend to only work with a small number of banks for their FX due to the complexity of setting up multiple banking relationships, making it harder for them to compare prices.
2. Tailored rates
Brokers and banks reserve their most competitive rates for the clients with the largest trading volumes. This is no secret. The European Central Bank produced a report in 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 and more sophisticated clients. The report’s author likened it to walking into a user car dealership and paying £50,000 for a car that others can buy for £5,000.
The lack of transparency, limited number of counterparties and discriminatory pricing all increases the difficulty for corporates to achieve, let alone demonstrate best execution.
Turning to technology
Fortunately, there are now alternatives to the traditional single bank-based approach which have enabled new entrants to offer a fairer way to transact in FX that addresses the inequalities and inadequacies outlined above. There are three steps that firms should consider to optimise this new, technology-driven approach:
- Get more transparency on pricing. The use of independent transaction cost analysis (TCA) exposes any hidden costs in the spread and enables firms to see exactly how much they are being charged for their execution.
- Gain access to a greater pool of liquidity. Multibank marketplaces, like MillTechFX, offer corporates access to multiple liquidity providers from a single interface. This enables them to see live rates of institutional grade quality on a single screen and to automatically execute at the best available rate.
- Take advantage of these benefits from a single location, offering streamlined workflow and regulatory reporting for best execution in addition to TCA, drastically reducing operational overheads as well as execution costs.
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 FX marketplace helps private equity firms significantly reduce both FX costs and operational burden associated with FX execution and rolling hedging requirements.
We provide access to a transparent marketplace for comparative FX execution from up to 10+ counterparty banks, while harnessing a unique and significant pricing efficiency for our clients.