In the wake of investigations and lawsuits, analysis shows FX trading costs starting to come down.
Custodian banks and others might be getting the message. Following recent investigations of alleged overcharging by external cash managers or custodian banks, the cost of trading foreign currency is going down, according to analysis by currency-execution consulting firm FX Transparency.
This will be good news for FX managers that have “standing instruction” trades with their custodian banks. According to the FX Transparency analysis, there has been “large reduction in costs” in 2010 for investors that give their custodian permission to execute currency trades on a standing-instruction basis. “Overall costs dropped to 11 basis points in 2010 from an average of 30 basis points in years 2000-2009, which represent a reduction of 63 percent,” FX Transparency said.
Scrutiny of FX trading costs mostly began after BlackRock, in due diligence of its purchase of Barclays Global Investors, wondered why BGI’s iShares exchange-traded funds performed better than competitors with similar products. It was told that the company used sophisticated analysis to monitor FX trades, which ultimately saved it money. This led to further investigation and ultimately lawsuits.
Nothing new
Monitoring external manager trade activity is something most astute treasurers and their FX managers already do. But this is certainly a good wake-up call to apply even more scrutiny. And this goes beyond FX. In the wake of the credit crisis, low yields have forced many companies to shift away from funds to mostly cash. Therefore, many corporations have been looking into alternative cash vehicles or cash-like products. Banks have sought to meet that demand with new products, which investors need to be careful about considering. Corporations usually conduct robust due diligence processes when hiring an external manager for a separate account and they should apply that same due diligence when selecting cash vehicles or products and of course, FX transaction costs. To this end they should continually ask questions (see related story here).
“Investors should consistently monitor these costs moving forward,” writes James McGeehan, FX Transparency’s CEO, in the FX Transparency report. “These costs are still three to four times higher than they are for negotiated trades.”