Performance analytics - helping to bring transparency to the FX pricing process
preaching TCA were preaching to those who had ultimate faith in their existing beliefs. But DuCharme also believes there was another reason for a lack of pricing transparency.
“On top of that the investment manager probably views the currency element of the trade as outside his area of expertise. As a result, the manager goes with a default contract and with the minimum amount of monitoring,” says DuCharme.
“It should be the
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Regulatory oversight It was a problem accentuated by the fact that the sector had no regulation. The QHZ 'RGG )UDQN ÀQDQFLDO UHIRUP ELOO OHIW FX traders largely immune to regulatory federal oversight and punishment for cheating clients. The European Union’s Markets in Financial Instruments Directive
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currency volumes, will dictate 30-50% of your overall currency costs,” highlights McGeehan.
Fiduciary responsibility 2QH RI WKH UHDVRQV 0F*HHKDQ LGHQWLÀHV IRU D ODFN RI price performance analysis was naivety. “After the cases in the press, many asset owners learned the FXVWRGLDQ GLGQ·W DFW DV WKH ÀGXFLDU\ ZKLFK FDPH as a surprise,” he explains. “The global custodian RIIHUV PXOWLSOH VHUYLFHV DQG DFWV DV ÀGXFLDU\ LQ the vast majority, but when it comes to FX in many FDVHV WKH FRQWUDFW LV VLOHQW $IWHU LQTXLU\ LQYHVWRUV later discover custodians act as principal rather than ÀGXFLDU\ µ KH DGGV
DuCharme agrees: “Of course custodial services usually come as a bundled package and it may be that the investment managers and clients don’t realise that the currency element comes without the ÀGXFLDU\ UHVSRQVLELOLW\ IRXQG HOVHZKHUH LQ the contract.”
In truth for custodians, long pressured to provide ever more services at lower costs over the past decade, the revenues from WKH FXUUHQF\ WUDGLQJ VLGH NHSW WKHP SURÀWDEOH
Many managers had thought best practice was inherent when using the custodian and those
30 Currency Investor | Autumn 2011
0L),' DOVR FRQWDLQV EHVW H[HFXWLRQ UHTXLUHPHQWV including time-stamping, but FX is simply not an asset under its provision.
Since foreign exchange traders earn money on their spread, the price at which they are prepared to sell a currency, rather than commission, there is a natural WHQGHQF\ WR VHOO DW WKH KLJKHVW SURÀW SRLQW LI QR RQH is paying attention to price. “The system places the traders’ interest in direct opposition to the client’s interest,” the Russell Investments report said.
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MICHAEL DUCHARME
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