We’ve been speaking to quite a few pension funds recently and there is evidently a great deal of confusion surrounding Foreign Exchange cost measurement. We provide cost measurement on a per-trade basis, irrespective of the presence or absence of time-stamps, and whatever the FX instrument used – spot, swap, forward, NDF, etc., so we feel equipped to provide some insight.
First of all a number of people have said things along the lines of, ‘It’s OK, I’m paying 6bps for my FX.’ When we look into this, we find that they are actually paying 6bps per trade, and not as a total annual cost.
When multiplied by the annual volume, the answer to what they are paying is more like 72bps per year on the FX volume. The difference between a ‘total annual cost’ and a ‘per trade cost’ is huge. The total FX volume is very often many times higher than the AUM being hedged, so it needs to be managed carefully.
Secondly, a number of clients have asked what is a reasonable cost to be paying. We find that many ‘Non-Expert’ clients pay a ‘fee’ between 10 and 20bps per trade. This can be contrasted with professional market users of FX, who we expect to pay between 0.4 and 0.5 bps per trade including their Prime Brokerage costs. We recognise that banks need to make a living, but our guess is that most users could find an improvement of 10bps per trade fairly easily and without changing credit structures – perhaps even keeping the same execution system.
As we said in another post, these are easy wins.
Have a lovely Sunday!