Created: 31 October 2024
Updated: 4 November 2024
Transaction Cost Analysis (TCA) plays a crucial role in modern FX risk management, offering insights into execution quality, cost efficiency, and overall performance. Whether you're a corporate treasurer or CFO at a fund manager, the ability to assess trade execution across a portfolio and identify cost-saving opportunities is invaluable.
Despite the obvious benefits, there are still a lot of misconceptions preventing CFOs and Treasurers from implementing TCA. In this article, we will dispel some of the top myths surrounding TCA.
In this article:
Transaction Cost Analysis (TCA) is often perceived as too expensive, but in reality, it offers significant value that justifies its cost.
TCA provides firms with detailed insights into the true costs of their foreign exchange (FX) transactions, including hidden fees, poor execution timing, and uncompetitive spreads. By identifying these inefficiencies, firms can make more informed decisions and improve execution, ultimately saving money over time.
CFOs and treasurers often misunderstand the ROI of TCA. The long-term value of TCA, which is the potential savings and optimisation of FX execution, can be difficult to quantify upfront. This leads to a common misconception that the costs of TCA are too high compared to the immediate, visible benefits.
For example, even a small improvement in FX execution—such as better timing or a reduced spread—can translate into substantial savings, particularly for firms with high FX volumes. Over time, TCA helps reduce slippage and improve trade execution, potentially allowing firms to make a quick return on their initial investment.
There is a way to avoid these initial setup costs – by outsourcing your TCA. Outsourcing TCA is often more cost-effective than maintaining an in-house team. Independent providers offer specialised expertise and advanced tools, allowing businesses to focus on their core activities while still benefiting from high-quality TCA services. External providers, such as MillTechFX, offer a host of FX risk management products, with TCA built into this offering.
If firms wish to implement TCA into their workflow, they must first decide whether to conduct TCA in-house or independently, as there are key differences between the two. Banking partners often provide TCA as part of a relationship but is this really independent? It’s akin to a student marking their own homework.
Independent TCA provides an outsider’s perspective, ensuring that the analysis is free from internal biases or conflicts of interest. This impartiality is crucial when presenting data to external stakeholders, regulators or auditors. Moreover, independent providers specialise in TCA and are equipped with advanced analytical capabilities, ensuring that clients benefit from the most up-to-date technology and industry practices.
Independent TCA providers also have access to a broader range of market data and industry benchmarks, which enables them to conduct more comprehensive analysis. Their rigorous data validation and quality control processes help to optimise the reliability of the results, aiming togive clients confidence in the accuracy of the analysis. Additionally, many independent TCA providers adhere to regulatory standards, helping firms meet compliance requirements and reduce regulatory risks.
Independent TCA also serves as third-party verification, providing an added layer of transparency and accountability that is especially valuable during audits or external reviews and for maintaining stakeholder trust.
You would be forgiven for thinking that TCA just covers costs, after all, it is called Transaction Cost Analysis. However, TCA in FX goes far beyond just simple cost analysis. While its primary function is to examine and reduce the direct costs of trading, TCA also plays a broader role in enhancing overall FX execution strategy, risk management, and transparency.
One of the key benefits of TCA is its ability to improve execution quality. By analysing the timing of trades, market conditions, and liquidity, TCA provides insights that help firms optimise when and how they execute transactions, leading to better pricing and reduced market impact. This strategic advantage can significantly enhance a firm’s FX operations.
Furthermore, TCA contributes to governance and compliance. In an increasingly regulated environment, firms need to demonstrate that their FX trading practices align with best execution policies. TCA provides the necessary data to validate that trades are being executed efficiently and in the best interest of the firm, ensuring compliance with regulatory requirements.
TCA also offers benchmarking capabilities, allowing firms to compare their execution performance against market standards or peers. This continuous evaluation helps refine trading strategies, improving both cost and operational efficiency over time.
For TCA to work effectively, it must be done regularly. Market conditions, liquidity, and spreads fluctuate frequently, which means past trade performance may not reflect current realities. By keeping TCA as a regular part of their operations, firms can consistently enhance performance and manage FX risks effectively.</p> <p>You should be provided with independent TCA on a quarterly basis, acting as a regular audit of all trades executed through our platform. This ongoing analysis enables clients to monitor their FX execution costs and assess their trading performance over time. By observing historical trends, our clients gain insights into long-term performance, which helps them refine their strategies and make adjustments as needed. We provide not only the data but also the opportunity for clients to discuss their TCA results with an FX specialist, ensuring transparency and addressing any concerns or areas for improvement.
TCA is far from a waste of time – as proven by all the points above. It provides critical insights into the efficiency of FX transactions, helping to eradicate hidden costs and inefficiencies, allowing CFOs and treasurers to optimise their trade execution and ultimately reduce their costs and enhance FX performance.
If you currently do not conduct TCA analysis at your firm, we can help. For prospective clients, we offer a free, independent TCA, which provides an in-depth analysis of their current trading setup. This uncovers any hidden costs and inefficiencies in their trading strategies, offering a clear cost comparison between MillTechFX’s execution quality and the client’s current setup.
This free analysis empowers prospects to make data-driven decisions and improve their trading setup, whether they choose to onboard with us, or not. Like with existing clients, prospective clients also get access to one of our specialist FX consultants, to provide further guidance.
These full FX audits are incredibly comprehensive and begin to give prospective clients an idea of how their TCAs could look if they choose to onboard. Our expert FX consultants talk through each aspect of the analysis, giving an opportunity for prospective clients to ask questions about their FX setups, ensuring they completely understand their FX workflows and the best ways to reduce costs and enhance efficiency.
If you are interested in a free TCA report for your company, speak to us directly or reach out to a member of the team at: info@milltechfx.com
We are delighted to announce we have been named ‘The World’s Best FX Risk Management Solution’ in the Euromoney Foreign Exchange Awards 2024!
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.