FX Transparency comes to Australia: expect a shake-up

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By Greg Bright

The global foreign exchange monitoring and consulting company which represents asset owners and managers, FX Transparency, has appointed a representative for Asia Pacific, based in Melbourne. The firm delves into the opaque world of FX, which, for big Australian investors at least, is both huge and not-well understood.

Brett Elvish, principal of Financial Viewpoint consulting firm, has been appointed as the regional representative of FX Transparency, a company with whom he has had a less formal relationship for several years. He started his career as a custodian, at NAB Asset Servicing, and moved into consulting with the former InTech Asset Consulting (now a part of the Morningstar group), of which he became managing director and led the sale of that business.

In recent times, he has been providing various management consulting services to big super funds and fund managers. He was also chair of IMCA Australia, from which he resigned late last year.

He remains deputy chair of the ASFA ‘Economics and Investment Policy Council’.

Elvish said last week that super funds and managers needed to understand the pricing involved in their FX activities, which were often more significant than they realised.

“There’s an enormous volume of [FX] trading,” he said. “Some funds and managers can be turning over more than 100 per cent of their portfolios in a year. The difference in being charged one basis point and three basis points for FX adds up.”

As with other areas, such as cash management, an obstacle on the road to better efficiencies for funds with FX is often the custodian. They tend to control most of the FX trades and people like Brett Elvish, say they are not always doing the best job possible. He is not alone. There have been several big lawsuits in the US, since the GFC in 2008, against custodians for what have been described as slack FX trading practices.

But the custodians point out, correctly, to their clients that core custody is an incredibly low – or even no – margin business which tends to be subsidised by other activities, such as FX management and cash. They are happy to pitch separately on FX, but the custody costs will rise as a result.

Elvish says: “There’s an asymmetry of information around FX. If you say to a fund manager ‘you are in the bottom decile in FX, they will be very surprised. Every fund manager has a best-execution policy but not a lot of them are properly monitored and managed.”

In a note to potential clients late last year, Elvish said: “Foreign exchange activity is complex, opaque, plagued by a-symmetric information favouring the sell-side (i.e. custodians and investment banks) and littered with scandals. Globally, fines are running into the billions of dollars across custodian and investment banks, and Australia’s five largest banks have all had enforceable undertakings relating to FX activities in the past 12 months.  Every asset owner and asset manager has been exposed to these issues, yet very few have taken substantive action and have appropriate governance arrangements in place.

“FX is typically the largest asset-owner trading activity. For many, it would be the largest cost which remains unquantified and unmonitored. Unfortunately, many asset managers (internal or external) are similarly not quantifying their FX costs, which raises the question of how are they conforming with their “best execution” obligations. Interests between asset owners and asset managers are not always aligned, and execution convenience may be at the expense of best execution.   Therein lies the opportunity for better outcomes.

“Good practice … certainly dictates that material service providers should be regularly independently monitored and evaluated.  If an investment manager – internal or external – is operating a hedging program for example, then this is the key skill that funds are paying for and independent evaluation of this “skill” is required….”

Elvish will be acting both as a consultant and business development person for FX Transparency in Australia, New Zealand and Asia. The Boston headquartered privately owned firm also has a London office.

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