Foreign Exchange and the Transaction Cost Analysis obligation.

The world of Transaction Cost Analysis (TCA) has now been greatly simplified by the regulators, with a clear and simple definition that unequivocally applies across asset classes.  Byzantine processes that don’t offer transparency to the investor can no longer be defined as TCA.  TCA itself is now indispensable to another regulatory obligation: TCF, or Treating Customers Fairly.

Overview Of The Regulatory Requirements.

European regulators have produced a plethora of regulatory requirements that place obligations on managers to conduct Transaction Cost Analysis (TCA) across all asset classes.  The regulators have also clarified who the TCA is aimed at, and why it is required.  These regulatory TCA obligations are covered by MiFID 2[1], PRIIPs[2], the Model[3]/Global Codes (from the ACI/Central Banks) and the recently-published FCA draft requirements for TCA[4].

Overall aim of the requirements.

The regulator’s underlying motivation is to create a market in investments that is not just efficient but demonstrably clean.  Managers are obliged to provide specific costs incurred in the management of a strategy in a simple form against easily understandable and common references.  With this information, investors can in principle make more informed choices.  All managers selling into European and UK investment markets are effectively covered by the regulation in one of its several guises.

Broad requirements.

To provide the cost of each transaction executed within a strategy on a simple and clear basis.  The FCA document expresses a good deal of frustration over ‘complex’ TCA or the misuse of Transaction Performance Analysis as TCA.  These behaviours serve to create confusion and a lack of comparability between costs and as such are of no use to the investor.  They have also made it very clear that the duty to provide TCA rests with the managing entity that incurs the costs – whether the costs are under the direct control of the manager or not.  Among other things,  this means that simply pushing business at a custodian and assuming that all is well is no longer acceptable.  This rule also ensures that anyone managing money indirectly (perhaps via a multi-manager product) is also obliged to comply.

Goals For Foreign Exchange.

Both PRIIPs and the FCA regulations carry detailed definitions of FX TCA.  The FCA paper also specifically singles out FX, requiring ‘full transparency’ in the light of recent scandals.  The manager must use the following simple equation and rules when calculating TCA.


The equation provided for a purchase is:

                (Execution Price – Arrival Price) x Units = TCA cost.  EP and AP are reversed for a sale.

The Arrival Price is defined as the ‘market-mid price at the time the order was transmitted’.  Again, this is expanded specifically for FX, where a consolidated rate must be used, and crucially it is not acceptable to use a rate from a single counterparty or platform.  The Arrival Price must be ‘determined using a fair reflection of the prevailing appropriate exchange rate, at the appropriate time’.

In addition to being a consolidated and independent mid-rate, FX data must be auditable.

Outlawing Complexity.

The regulations are focussed on ensuring that all TCA is comparable and so there are a number of points about removing complexity in the calculation process.  Nowhere in the regulations are the regulators concerned with the empirical performance of an asset manager, or how a manager chooses to execute.  The regulations simply seek to ensure that Manager A and Manager B produce a TCA cost in a similar way, and can be compared.

For this reason aspects such as Market Impact and the use of a size-adjusted spread are specifically excluded from TCA, and should now be regarded as aspects of Execution Performance Analysis.  This latter analysis might be of great help to managers in refining and lowering their overall TCA costs, but cannot be regarded as part of the TCA process.

How NCFX Can Help.

NCFX supply a live, independent, consolidated mid-rate feed that fulfils the regulatory requirement to measure FX deals on an ex-ante basis against correct, unbiased data.  We offer no trading services whatsoever.  The NCFX feed is also fully auditable.  We supply Excel-based tools that ensure that you can do your TCA easily and quickly against data that will fulfil your regulatory requirement for spot and forward/swap FX deals.  NCFX tools also ensure that your data does not leave your desktop.


The regulator has decided that any costs being incurred in the course of portfolio management must be disclosed to investors.  This has nothing to do with the performance of the asset manager, and is a requirement designed to create a clear and level playing field with regard to implicit costs.  The requirement is straightforward, as is the solution.



[1] Directive 2014/65/EU, Article 24.  May 2014.

[2] PRIIPs RTS Annex VI, Article 17.  March 2016.

[3] The International Code of Conduct & Practice for the Financial Markets – ACI.  February 2015.

[4] ‘Transaction Cost Disclosure in Workplace Pensions’ CP16/30.  FCA.  October 2016.