Are you being screwed on FX? Check with Transaction Cost Analysis
by Kylene Casanova
The annual FX market turnover is some $4 trillion per day (Bank for International Settlements) and FX has been one of the largest sources of bank trading profits for many years. Yet it is all too easy to accept the FX rates offered. They need checking.
Klarity FX, an independent FX Advisory company, believes that you can only manage these costs if you Measure and Monitor them diligently. They use the following process.
Explicit and implicit costs and the data needed
FX Transaction Cost Analysis (TCA) reveals the true cost of executing a deal. The Explicit Costs are reasonably transparent, the spread plus any agent fee. But what if the spreads are not readily available and reported?
The Implicit Costs are much more difficult to ascertain. There are three sources: market impact, delayed execution and missed trades which can be used to mask excessive spreads.
To carryout TCA, data is needed on each transaction, typically this will include:
- transaction ID
- payable currency and amount
- receivable currency and amount
- contract rate
- trade date / time
- settlement data
- FX counterparty.
TCA analysis process
Klarity FX take this data and first check it for data integrity and then carryout a series of analyses: against market data dependent on request and input quality, proprietary spread modelling and statical analyses. The outputs from the process include: individual transaction breakdown by counter-party, FX territory, value analysis, statistical distribution comparison, significance testing, and benchmarks testing. These results are presented in a dashboard in a clear and concise report on whether the FX transaction costs are fair and reasonable, see figure.
FX TCA Ouput
Source & Copyright©2012 - KlarityFX
The TCA results can be analysed by drilling down into specific results and working with the FX provider to improve costs.
Results from carrying out a TCA analysis vary, Klarity FX have typically seen improvements of 0.10% in the spread taken, that doesn't sound like much until you note that on a $100mln exposure that is a $100,000 improvement direct to the corporate or the pension plan.
Like this item? Get our Weekly Update newsletter. Subscribe today