We have read with great interest the FX Week exposé of the market practises still common in the Foreign Exchange (FX) markets.  The problems highlighted in the article are of importance to investors because they serve to conceal costs and conflicts of interest from them.

The practise of embedding the cost of TCA within transaction costs is a form of cost shrouding. It pushes the fee for transaction cost analysis back onto the end investor and increases overall costs.  Investors are not able to differentiate the source of transaction costs and are not asked for their permission. If asset managers do not disclose these practises to their clients, embedding entrenches the conflicts of interest within the FX execution process.

The aim of this piece is to provide a summary for asset managers and investors of where FX costs stem from, what their quantum might be and to look at ways of minimising those costs.  The reality of FX costs is that they are high when unmeasured but can be reduced significantly, once they begin to be measured, often by simply challenging banks about their charges for FX services.

In general, it would be useful to recognise that client business in FX is very attractive because it is almost always profitable.  The bank or broker can always find the hedge price before they confirm a price to the client, and FX platforms simply add a fee for every deal done.

FX Costs

FX costs are significant to investors but remain largely ignored.  Costs are hidden in spread and vary widely.  Across the NCFX client base we find the following:

  • The average internationally invested investment portfolio annually executes roughly 8 times the total assets in FX transactions. This increases for hedged (non-base currency) share-classes of a strategy.
  • NCFX clients who have not measured their FX costs are paying on average USD 750 per million dollars traded (7.5bps). Some pay over USD 1,000 per million dollars traded.
  • By measuring FX costs and using those results to negotiate with brokers, costs fall to USD 250/million (2.5bps) and often lower. This is achieved without changing bank, broker or any other arrangement.

The impact of FX costs on performance is significant:

MSCI WORLD Standard USD Return Return at USD 1/MM Cost Return at USD 250/mm Cost Return at USD 500/mm Cost Return at USD 1,000/mm Cost
Total Return % 33.85% 33.21% 32.26% 30.69% 27.61%
Total Lost Value % 0.00% 1.88% 4.69% 9.33% 18.44%
Annualised RoR % 7.45% 7.41% 7.35% 7.24% 7.01%
Annual Cost (BPs) 0.00 4.00 10.53 21.45 44.60

*All data from NCFX and MSCI.  Based on a monthly rollover cost only and no intra-month transactions.  In reality intra-month transactions should be added, further increasing the overall costs.  Data range 02/14 to present.

FX Execution

There are numerous issues surrounding FX execution, many of which are currently unfolding in various courts, and some of which, such as ‘last-look’ practises that remain under intense scrutiny and are potentially the subject of further litigation.

Here we are interested in the issues facing asset managers that execute FX business solely for the facilitation of non-base currency denominated business and hedging, rather than looking at FX as a tool for speculation.

The key issues arise when investors fail to identify who is paying who, and how valuable the FX volumes they own actually are.

  • When using an FX platform, or ‘aggregator’ it must be recognized that platform aggregators of FX prices are paid by banks and brokers for access to their investor clients (i.e. you).
  • The aggregation service appears to be free to the investor because the cost is added to the spread made into the platform by the bank.
  • The fee paid by the investor’s bank to the investor’s price aggregator is NOT disclosed to the investor.
  • Execution through a custodian often creates issues because custodians have been known to avoid time-stamping FX deals accurately. What incentive for transparency do they have when custodial FX business is conducted on a principal basis.

Transaction Cost Analysis

It is difficult for investors to find the lowest cost path to execution as there are many conflicting parties trying to win the client’s FX flow.

Under MiFID2 rules it is necessary for banks and brokers to provide disclosure of aspects of costs, but we are now seeing asset managers who are selecting conflicted forms of execution in order to get their TCA done without having to pay for it.

  • TCA costs are potentially being added to the FX spread. This addition may not be disclosed to the investor (and these costs are uncapped – the investor pays every single time they trade) so that the asset manager doesn’t bear these costs. This is fine if agreed with the investors.
  • Investors therefore need to be aware of how they are paying for TCA, and how their asset manager is approaching the subject.
  • Adding to spread reduces performance. One tick (roughly one USD per million traded) added to a trade knocks off 4bps from the performance.  Given that custody often only costs 4bps, that’s a very expensive service.
  • If fees are added to the spread, the investor is being charged to understand how well the asset manager is executing the business, rather than that being a cost borne by the asset manager.
  • Where the TCA service is not being added in spread, but the TCA provider is in fact being paid by a bank, broker or platform, the TCA service is not independent. The conflict of interest is clear as the TCA provider is the client of the bank or broker, not the investor.


NCFX provide the world’s first and only live, streaming FX benchmark registered by ESMA under the EU Benchmarks Regime 2018.  We do not make our rates available to trade, and they are overseen by an independent oversight body.  We have gone to these lengths because:

  • Data from single sources, be that single platforms or brokers is inadmissible under PRIIPs.
  • In the MiFID Q&A (Dec 2017, Q8, Page 69) ESMA require that TCA is conducted according to the PRIIPs regulations.
  • NCFX data is therefore suitable for both MiFID and PRIIPs requirements.
  • ESMA’s point recognises that it suits banks or platforms to use their own data when measuring FX costs. This is because the measurement is circular, and flatters the costs for that bank or platform, effectively removing the cost that they are causing for the client.


FX costs have a material impact on transactions, and therefore need to be acknowledged and managed.  In seeking to manage costs it is tempting to allow the FX industry to provide short-cuts that mean TCA can appear to be free.

We believe that TCA should be paid for as a service that is external to trading.  We believe that when TCA costs are mixed up with trading then the investor loses out.  Indeed, NCFX charge a clear fee for TCA services in order to eliminate these conflicts.

FX should be a low cost, low impact aspect to portfolio management and not the gravy train that it remains today.  Without independent, unconflicted approaches to TCA, investors are left in the dark. It falls to asset managers to recognise the issues and help their clients, and for investors to demand the highest standards in measuring their FX costs.