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Foreign Exchange

Mercer launches FX transaction cost monitoring

Mercer, the global asset consultancy, has launched a service allowing institutional investors to monitor the costs involved with the FX transactions executed on their behalf by custodian banks and currency managers, the company said in a statement.

Mercer says monitoring the exact costs associated with currency transactions has historically been difficult due to the opaque nature of FX markets. As such, there has tended to be a lack of oversight from pension funds and other institutional investors regarding the costs associated with foreign exchange executed by their currency managers or custodian banks. However, following the recent allegations against several institutions of deliberately applying uncompetitive exchange rates to their clients’ currency transactions, investors have become keen to monitor their foreign exchange costs with far more scrutiny.

Mercer’s custom-built system enables investors to review all spot and forward FX transactions undertaken by an intermediary, which can then be mapped against market data, taken primarily from external sources such as Bloomberg, to determine the competitiveness of those transactions.

In an ideal world, each trade executed by a custodian or currency manager would be time stamped allowing for direct comparison with market prices at that specific time, though many custodians do not offer this to their clients.

In the absence of time stamped data, Mercer’s system compares each currency transaction with the range of exchange rates for that day. Therefore, investors are able to monitor the currency transactions executed by their custodians and compare them with the daily trading ranges for the currency pair in question. Any currency transactions executed on an exchange outside of this range are immediately flagged up. Over time, a client receiving best execution from their custodian would expect FX transactions to be quite tight around average daily exchange rates.

Large custodian banks, Bank of New York Mellon and State Street are still facing lawsuits against alleged mishandling of foreign-exchange transactions for pension funds. The claims centre on discrepancies between the time of day the currency transactions had been made and the trade price that is charged to the fund.

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