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Foreign Exchange

FX outsourcing is quick, but not always easy

Margin pressures on buy-side clients such as asset managers have prompted increased interest in outsourced FX solutions, but firms must know exactly what they are paying for.

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Cost and time to market are two of the main motivations for outsourced FX execution.

Regulation, fragmentation of liquidity and advances in electronic trading products and services have driven up the cost of in-house execution tools, which can take 12 months or more to implement compared with outsourced solutions that can be accessed much more quickly.

In addition, the availability of independent transaction cost analysis (TCA) means firms are more aware of the costs associated with executing FX, especially those who have been paying millions of dollars a year in broker fees.

However, if an outsourced FX provider is promoting itself as an agent, buy-side clients need to be sure that the provider is fully acting as a fiduciary.

So, in cases where the service provider also has a principal business, clients need to ask whether there are proper separations in place to ensure that information does not leak from the agency side to the principal side.

This will usually mean the two sides of the business are separated in terms of operation and information, although physical separation can also be helpful.

Guidance

Some asset managers will have clarity over their historic FX trading and processing costs, and will therefore have clear expectations of the costs involved, whereas others may require considerable guidance.




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