Here are the requirements for the correct reporting of Foreign Exchange transaction costs under MiFID2 and PRIIPs, and the relevant rules from the relevant legislation.

Firstly, the PRIIPs standards for cost reporting are required under MiFID2.  This was clarified by ESMA in its December 2017 Q&A document.  See Q8, Page 69.  There is no exemption under PRIIPs for FX Spot, which is simply seen as a cost component.

Secondly, the PRIIPs standard for FX TCA requires a slippage measurement, as in every other asset class, which entails measuring the achieved fill against the arrival price midrate.  The arrival price is the time at which the order was transmitted to another party.  In addition to the common requirements, PRIIPs makes the following stipulation for FX:

Annex VI, Point 17:

“In calculating the costs associated with foreign exchange, the arrival price must reflect
a reasonable estimate of the consolidated price, and must not simply be the price
available from a single counterparty or foreign exchange platform, even if an
agreement exists to undertake all foreign exchange transactions with a single

This means that you cannot use an FX rate coming from a platform aggregator of prices or from a single bank, broker or custodian.  The reason for this is that all of the above would very much like you to use their rate, because it hides the cost associated with their platform.  If a price aggregator can get you to use their price then they are not being measured accurately and their cost contribution cannot be understood.  NCFX data, registered under the EU Benchmarks Regime by the FCA, solves this issue.

Thirdly, the asset manager is required to pay for third-party TCA services and not to bundle costs into the FX spread.  This was made clear by the FCA in their guidance (PS17/14) in July 2017.  See pages 50/51 where they make it clear that…

“For example, provision of third party trade analytic tools, order
management systems, or RPA administration services to a MiFID
investment firm, should not be considered as inextricably linked to
an execution service. Firms subject to the enhanced inducements
restrictions would need to procure such services separately using
their own resources, and could not pay for them through enhanced
execution costs or research charges passed to their clients”.

So in summary, to achieve compliant FX TCA you must:

  1. Apply PRIIPs standards to all TCA, including spot deals.
  2. Use an arrival price midrate to compare to the achieved execution.
  3. Use data that does not come from within your cost chain.
  4. Use data that is not from a single broker or price aggregation platform.
  5. Pay for any third-party service and not bundle costs of TCA in spreads.
  6. Report at least annually to clients.
  7. Use TCA to inform a continual process of execution analysis.

It is often very difficult to specify arrival times in FX due to deals being done on standing instructions and so on.  We therefore believe that it is important that managers detail precisely what methodology is being used to establish a fair arrival price reference.  This should form part of a TCA policy statement that includes the data used to arrive at the calculations, the involvement of third-parties and how they are paid, and any other aspects of the process used to arrive at the overall cost of FX.

Finally, you need to ensure that you know precisely what has happened to your client’s trade data.  If you are sending data outside your organisation how is the data being used by other people, and have you consented to its use by them?  If you have decided to accept its inclusion in peer analytics, do you have the correct authorisation to do so from your investors?  NCFX have decided not to provide peer analytics and we hold no client trade information.