NCFX have achieved official recognition of their rates by the FCA under ESMA rules. The question for FX users is how does an independent FX benchmark help, and why use the NCFX products?
- FX is a material issue. FX execution is a requirement for almost everyone in the asset management business. It’s very rare to find a portfolio without FX exposures that must be managed and executed. In addition, the volume of FX requirements is usually much larger than users think. Our estimate is that a long-only manager will do roughly 4 times AUM in turnover every year.
- FX is a material cost. Assumptions of liquidity and transparency mean that plenty of users believe that their FX is being done efficiently and don’t check the costs. Somewhat unsurprisingly we find significant variation in FX costs as a result. A well-managed portfolio will cost as little as 100 dollars per million traded, but sadly we often see costs of 500 or 1,000 dollars per million traded. Obviously if you don’t check your costs, you have no idea.
- FX costs are (usually) optional. We have yet to come across a bank or broker that won’t work with its clients to reduce costs. Identifying the costs and then reducing them saves millions and often requires no more than data and a ‘phone call.
- NCFX is objective. As in any system that you wish to observe and measure, you must check what is going on against a benchmark that is not controlled or influenced by the system being measured. Same goes for FX. NCFX rates cannot be traded, so your bank or broker can’t take your trades and execute them on the NCFX rate. When your measurement rate comes from within the system, the bank has the possibility of using the source of the data to execute your business – thereby creating the data which is used to measure.
- NCFX is compliant. The ESMA definition of FX TCA requires use of a consolidated rate that doesn’t come from a single platform. Their aim was to eliminate the circularity issue outlined in Point 4 above. In addition, NCFX is also registered by the monitoring authorities and has independent controls in place.
- NCFX is transparent. We don’t get paid by adding ticks to FX deals. In fact that seems to us to be absurd in a world of unbundling. We send a bill and it’s usually quite a small bill too.
- NCFX is live. You don’t need to wait for results. Just plug in your data and get results.
- NCFX is live (Part 2). By producing a benchmark rate 20 times a second, it is no longer necessary to use antiquated benchmarks that are at the heart of many of the world’s FX issues.
We believe that FX costs should be understood and managed by anyone claiming the important role of asset manager. We are committed to measurement being done against independent, registered data so that when you measure you know that your bank wasn’t able to influence the measurement rate in some way.