Sponsors face big challenges in FX – survey

Fund managers have become increasingly involved in FX hedging as interest rates rise, but they are experiencing challenges due to reliance on manual processes and with getting good pricing, according to a new survey commissioned by MillTechFX.

The London-based company, which offers an end-to-end service to help fund managers streamline their FX activities, found that trade execution took the top spot for respondents’ biggest operating challenges. Specifically, the survey showed that about 43 percent cited “demonstrating best execution.”

Eric Huttman, MillTechFX’s CEO, told Private Funds CFO that the concept of demonstrating best execution is a requirement under Europe’s MiFID II regulation. “You need to be able to demonstrate that you’re getting access to the best possible pricing,” Huttman said. He added that one of the ways to do this is by having several counterparties.

The study noted that fund managers’ reliance on small numbers of trading partners impedes achieving best execution. “Onboarding liquidity providers” was the fourth-most cited operating challenge by respondents, coming in at almost 36 percent.

The survey’s 250 respondents are “senior finance decision-makers at fund managers,” the firm said.

Huttman said that respondents are involved in FX trading for what he called “second-order purposes,” meaning hedging, investing or both. Respondent fund managers are involved in different private capital asset classes, he noted.

The second- and third-most cited operating challenges are intertwined, per the survey. It found that nearly 40 percent cited “getting comparative quotes” for pricing, while about 37 percent named “manual processes.”

MillTechFX, a sister company of FX asset manager Millennium Global, said that reliance on manual steps makes fund managers’ responses to pricing inefficient.

“FX price discovery can often involve multiple phone calls, emails, or online platforms to log in to just to get comparative quotes from your counterparties,” the report noted. “Because the market is constantly moving, price discovery requires a team of people; calling, emailing and logging in simultaneously before they can collectively decide who offered the best quote.”

Managers say FX is key, but aren’t pleased with setups

While FX is a growing and important part of sponsors’ work, a majority of respondents (about 57 percent), gave average or underwhelming replies when asked about own operations. Specifically, the survey showed that 24 percent felt their FX setups were “fit for purpose,” 26 percent said they were “below average,” and around 7 percent called theirs “worst in class.”

In contrast, about 43 percent expressed positive opinions. About 28 percent called their setups “above average” and some 15 percent called them “best in class.”

Majorities of respondents reported higher FX activities due to international investing and their mix of investors. Seventy percent said their company’s cross-border investments have gone up over the past five years. During the same period, some 66 percent said their funds’ non-base currency investors have increased.

Respondents overwhelmingly viewed FX as important to their businesses, with about 64 percent rating it “very significant” and about 29 percent as “somewhat significant.”

A look ahead

Most respondents want to make changes to automate their FX operations. The survey found that 84.4 percent said they are looking into newer technology/platforms to drive automation.

MillTechFX also found degrees of concerns around outsourcing. Examples given included about 41 percent citing “lack of control” as a concern when using third party service providers for FX. Some 37 percent worry about costs associated with outsourcing going up.

The company noted that outsourcing succeeds based on the partner selected.

“When using the right partner, outsourcing frees up resources for more effective use elsewhere and can lead to improved execution, enabling firms to dedicate more time to core business matters,” it said.

Aside from outsourcing, MillTechFX said that fund managers’ treasurers can turn to fintechs to gain access to more banks that provide liquidity. Fund managers can also hire an outside company to perform a quarterly transaction cost analysis (TCA). The purpose of the analysis, MillTechFX explained, is “to highlight hidden costs and enables firms to understand how much they are being charged for the execution of their FX transactions.”