INVESTOR PERSPECTIVES
Performance analytics - helping to bring transparency to the FX pricing process
BY GERRY O’KANE
For years, many professional currency practitioners have seen trustees’ and investment managers’ eyes glaze over when asked two questions: how much they paid for the currency management component of their securities trading and how transparent the cost was to them? The same people would probably have completely dozed off had practitioners asked what sort of performance analytics they utilised on their forex trading, in spite of this type of analysis being a common and booming practice in the equity world.
W
hat woke them all up was the news that the State of California had taken legal action against its custodian in late 2009,
suing for $200 million for illegal overcharging of the state’s two largest pension funds, CalPERS and CalSTRS. The custodian involved, with $15.9 trillion in assets under custody, the lawsuit alleged, consistently charged the highest daily rates for currency trading. To add insult to injury said the suit, the bank then tried to conceal data to prevent a full forensic audit.
For Neil Record it came as little surprise. The founder and chairman of Record Currency Management and former Bank of England economist said he warned CalPERs in 2003 that they were being overcharged on their currency deals after being asked to look at their forex trading.
He still warns that trustees and managers do not pay enough attention to trade execution and pricing SHUIRUPDQFH ´,W VKRXOG EH WKH ÀUVW TXHVWLRQ ² KRZ good is the execution for my currency deals and is there a methodology for doing that?” advises Record.
Handling currencies There are three ways currencies can be handled by investment managers on behalf of their clients. One is building and running their own currency trading desk, a rare route to be taken by investment houses
28 Currency Investor | Autumn 2011
primarily because of cost and experience, but also because it is regarded as moving away from core business. Another is to build preferred relationships with counter- party banks and manage it, with all the work that involves or pay to use an agent. Most common is to outsource FX trading to the custodian bank.
For all trading, however, knowing how to get best value can be achieved with currency performance attribution. So the issue of the custodial banks has served to highlight an LQGXVWU\ ZLGH ÁDZ
TCA Evidently the managers were not monitoring things closely enough. One of the best-known tools in measuring pricing performance is transaction cost analysis (TCA), something that has been around IRU DW OHDVW \HDUV LQ WKH HTXLWLHV VSDFH 2YHU WKDW WLPH DQG QRZ DOPRVW XELTXLWRXV PRVW EX\ VLGH institutions spent considerable time and resources to measure just how cost-effectively they executed on their stock trades. It is a concept almost entirely alien to the majority of investment managers who handle currency in the background, although interest is now SLTXHG
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92