We’ve all seen the news about how a U.S. federal Judge has ruled that the government can sue BNY Mellon over mispricing of FX transactions for some custody clients. There is also a good deal of analysis of how this might be a template of sorts for similar, sell-side lawsuits.
The question now is whether the buy side might be the next in line for similar lawsuits.
Mutual funds have an obligation to achieve the best pricing available on the securities they buy or sell with investor funds. That includes the cost of any associated foreign exchange settlements. Even if fraud occurred at the custodian institution, there is a seeming inconsistency that fund managers, who sweated out every fraction of a penny that a security rose or fell, then delegated a huge portion of the total transaction cost to a third-party in rather cavalier fashion… especially when it turns out that the third-party might not have been delivering good pricing.
It’s interesting to consider whether investors might now be looking at these fund managers and wondering whether they exercised adequate due diligence around foreign exchange transaction costs.
Regardless of whether the recent wave of lawsuits hit the buyside, it’s clear that the pressure is on for fund managers to demonstrate increased transparency.
Now, buyside institutions are moving quickly to adopt tools like real-time transaction cost analysis for FX, which can demonstrate their traders’ value-add, including their ability to maximize returns and minimize associated costs. This makes sense, because the firms that do not will have a harder time retaining investors and risk raising the ire of regulators.
In addition to the relationship-management benefit that real-time TCA for FX provides, it also delivers actual results: Increasing returns by lowering transaction costs.
To be sure, adopting new tools requires traders adapt to changes to their existing workflows.
That said, these tools DO add value. And because there are a cloud-based providers of these services (like TradingScreen), this additional insight doesn’t come with a corresponding increase in overhead around staff and hardware.
Sign up for a free transaction cost analysis of your foreign exchange, or for more information about TradingScreen’s TCA for foreign exchange available through the cloud.
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