How can freight transport and logistics firms navigate rising FX challenges?
Amongst the growing number of challenges facing freight transport and logistics firms is the threat of adverse currency movements.
22 September 2022
Best execution is one of the most commonly used terms in foreign exchange (FX) and across other financial markets.
Yet despite all the controversy and regulatory intervention relating to FX best execution in recent years, many senior finance decision-makers at corporates still don’t understand how to achieve it or realise they aren’t achieving it, due to opaque nature of FX execution.
Best execution is a regulatory requirement that investment services firms, executing orders on behalf of customers, take all sufficient steps to obtain the best possible results for their clients.
There are many factors to take into consideration in the quest for FX best execution:
Best execution is covered by various market principles and regulation originating from the FCA Conduct of Business Sourcebook and Principles for Businesses, the FX Global Code of Conduct and, most notably, MiFID II.
Combined, they stipulate that investment firms should:
We believe many corporates are paying more than they need to for FX and struggling to achieve best execution. In our view, there are three main reasons for this:
For corporates who trade FX for payment or hedging purposes, FX can be seen as second-order: they transact in FX not because they ‘want to’, but because they ‘have to’ due to international business activities. It is thus often operationally inefficient for them to set up and manage multi-bank relationships.
This makes it difficult to compare the market – so when executing trades, corporates and asset managers are often beholden to limited sources of liquidity. At any given time, they may not be able to trade at the best available rate as they have no other access points to the market.
Pricing transparency is a recurring problem as FX costs are typically hidden in the spread. 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.
For example, if a corporate buys €5m of 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 €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.
One of the main issues in the FX market, in our opinion, is that clients are provided rates in different capacities depending on what kind of client they are – a concept called “tailored pricing”.
As a result, the best rates are reserved for institutions that transact the highest volumes, meaning mid-sized corporates and asset managers are often neglected and struggle to get the best possible deal.
A 2019 paper from the ECB found that banks were overcharging small corporate customers for FX services, charging hedging rates as much as 25x higher than their bigger, more sophisticated customers.
MillTechFX is an FX-as-a-Service (FXaaS) pioneer that enables corporates to access multi-bank FX rates via an independent marketplace. Our mission is to democratise multi-bank FX execution and provide a level playing for corporates.
Our end-to-end solution automates the FX workflow and ensures transparent best execution – saving clients time and costs.
Jason Gaywood, Head of Corporate Solutions
Jason has over 20 years’ experience in the deliverable FX and Payments space. During his time in the industry, he has worked extensively across the UK, MENA, North American, and Australasian regions. Prior to this, Jason started his career as a graduate at Liberty Brokerage Inc. (now part of TP ICAP plc) where he spent six years as a US Treasury IDB.