The recent Reuters article concerning the SEC in the USA expanding their probe into foreign exchange trading, did make me smile, “not another custodian caught with their fingers in the cookie jar”.
Now, Custodians are meant to be a conservative, safe and honest pair of hands to hold the assets of investment funds and the likes of you and me, so seeing behavior like this (relying on opaqueness) does give cause for concern as this behavior is totally unnecessary.
There is no reason (other than “it has always been done like this”) for a Custodian to rely on opaque FX pricing to make money. The Custodian holds the assets and FX flows are generated by the assets (e.g. corporate actions on equities). Therefore, the Custodian already has the flows captured so is guaranteed the revenue anyway! It’s like having a pocket full of cookies and still raiding the cookie jar “because you can”.
So how do we fix the situation for both the Custodian and the client?
It is very simple – pricing, automation and transparency.
1. The Custodian and customer agree a clear pricing schedule
2. Automate trading of all FX flows in real time
3. Book each trade showing the customer rate and the mid-market reference rate
All three could be implemented using a platform like theCurrencyCloud.com – custom pricing for each customer / currency / trade size, automation of the FX trading, and all trades are booked with a mid market reference rate and the customer rate.
That way, the Custodian still gets the business (and can put their ethical hat back on again), the customer has a fully auditable FX trade history and the regulator can be certain that they will not be called in again – a win win all around!
This really should be a “no-brainer” for the Custodians, additionally they will save costs through automation and deliver better customer service.
Nigel Verdon, CEO and Founder, FX Capital Group