Investment managers are facing unrelenting pressure to improve returns, reduce costs, and illustrate “best execution,” while keeping resources focused on core competencies. It is not surprising that more are assessing whether their foreign exchange programs deliver value to their stakeholders and achieve optimal performance. Unfortunately, many managers view trade execution to be the only factor that warrants review, and in doing so they unknowingly establish a performance standard that is too narrow for their program.

There is no question that execution quality is critical, but performance can also be significantly impacted by a variety of operational activities that occur both pre and post-trade. A well-balanced FX program should consider many factors, including effective execution, operational efficiency, precise calibration of program implementation parameters and the availability of transparency throughout the entire FX process.

By understanding these factors in more detail, investment managers can define an FX program designed to deliver optimal performance for the manager, funds, and shareholders. Managers committed to investing in an in-house FX program may find their resources aren’t being deployed as effectively as possible. Other managers who partner with an external provider to manage one, or many, elements of the FX process may realize the need for additional evaluation to ensure they are exercising proper oversight and care.

While no clear trend has emerged regarding insourcing or outsourcing, one thing is certain: more investment managers are evaluating alternatives to their current FX workflow as they begin to understand the performance factors they had not previously considered.  This paper reviews those key factors, serving as a roadmap to help managers define their optimal FX program.


Today, there is a wide range of execution strategies available to global investors. However, as recently as a few years ago, execution choices were limited and the majority of managers fell into one of two black-and-white categories: active or passive FX management. Within each category, there was little flexibility. Managers executing FX trades actively had done so by phone or through simple single-bank electronic trading platforms that connected them to their liquidity providers.  Alternatively, managers executing FX trades passively typically used custodian standing instructions or other external service providers that offered minimal customization and lacked transparency. In today’s FX world, there is far less black and white.  Active dealing desks now have more execution venues than ever, including an array of single-bank platforms, multi-bank platforms, sophisticated aggregators, Electronic  Communication Networks (ECNs) and algorithmic trading models. Passive managers also have an increasing number of execution options that are proving to be more competitive and transparent than ever before. These include agency execution, principal execution with transparent spreads and  execution linked to industry fixing rates (e.g., WM Co. benchmark).


While active FX traders may have the most control over their execution process, they are still required to provide their clients and internal oversight teams with reporting that demonstrates the effectiveness of their trading decisions. This can only be achieved through investment in technology, including ongoing system reviews/enhancements to ensure their strategy remains relevant in a rapidly changing e-FX space. Some of these active managers focus on adding value by timing markets, while almost all of them look to minimize bid/offer spreads at the time of execution.  Active trading can be effective in today’s environment, however a number of factors including FX volumes, availability of skilled traders, sophistication of systems and operational capabilities should receive consideration during the valuation process.

Managers who elect a more hands-off, passive approach to FX execution also have a responsibility to monitor their trade rates. While a passive approach typically leads to a lower risk (via a transfer of risk from the manager to an external provider), more cost-effective operational process, it is critical that managers who select this approach can ensure their external providers are pricing trades at fair and appropriate rates. For managers who a) approach FX passively, b) view it as an operational burden or c) do not have the right in-house trading resources, there are now more outsourced options available which provide increased levels of clarity around the true cost of effective trade execution to ensure their stakeholders are benefitting.


FX trades originate from a number of sources, including transaction settlement requirements, income, and dividend repatriation, hedging currency exposures and speculative trading decisions made by portfolio managers. During the pre and post-trade process, a variety of operational activities occur -- trade generation, validation, transmission, confirmation, settlement and reporting all represent potential sources of error. Any miscalculated, omitted, duplicated, delayed, failed or off-market trade can result in financial consequences that far outweigh the expected trade execution benefits from managing an FX program in-house.

To effectively satisfy internal risk management policies, investment managers need a robust calculation and reporting system that ensures both accurate trade generation and post-trade settlement and reconciliation capabilities. For more complex FX programs, it is rare that all trading requirements are generated and monitored within a single system. Quite often spreadsheets and other manual tools are utilized to manage more bespoke requirements (FX hedging is a common example). However, as firms grow, manual processes can become unwieldy and increasingly risk-prone, causing sleepless nights for the operations team responsible for maintaining them. If the operations team is not losing sleep, the portfolio and risk managers should be. Furthermore, managing various tailored solutions across multiple FX workflows creates disjointed oversight, validation and execution of those trades. The lack of a centralized process not only exacerbates the risk concerns, but may prevent optimal trade execution and lead to increased costs to underlying investors.

As investment managers are seeking ways to further reduce operating expenses and risks, many are considering whether it makes sense to continue managing their FX in-house. They are instead looking to external partners to develop customized solutions that cover any number of FX requirements. These providers are achieving more scale than ever as they leverage large trading relationships and make ongoing investment in specialized systems and technology to support multiple clients with similar needs.


Implementation of the FX program is not only about ensuring the operational workflows are designed to precisely adhere to the defined rules and parameters, but also about properly calibrating those rules and parameters in a way that positions investment managers to achieve their FX performance objectives. Even if your FX program is implemented with operational perfection, the calibration of the process is a significant driver of performance.

The list of parameters requiring proper calibration is extensive.  A few common and highly-sensitive implementation challenges include:

  1. Optimizing the number of and timing of security related FX “sweeps” per day to properly balance low latency with maximum netting and deep liquidity.
  2. Determining forward contract tenor when creating or hedging positions to mitigate unwanted credit risk, sizable cash flows and unanticipated interest rate risk.
  3. Selecting the appropriate hedging parameters such as trading filters (hedge ratio filters), re-balance frequency and execution timing to minimize both costs of trading and tracking error from an imperfect hedge.

Implementation decisions are ultimately the responsibility of the manager, whether the function is performed via an in-house process or an external provider. While it’s imperative that managers give careful consideration to program structure, the information required to properly calibrate the process is commonly unavailable. Managers are often left in a position to make uninformed decisions, which can lead to sub-optimal results.

External service providers are continually developing more robust analytical tools to better quantify the impact of these decisions and ultimately provide useful insight to optimally calibrate client programs. This is particularly helpful as the definition of “optimal calibration” and the resulting FX process can vary significantly by manager depending on their FX objectives. Quantifying the impact of factors other than execution is critical to customizing a properly balanced program.


Program sophistication aside, the scrutiny and demand to demonstrate the performance achieved through the overall FX process is drawing increased attention. Demonstrating success is only possible through rigorous evaluation of and reporting on the various components, including execution, pre and post-trade decision-making and performance attribution. 

Perhaps the most prominent demand in the market related to “transparency” is the need to demonstrate fair and appropriate trade execution. As such, the concept of “best execution” has gained traction over the past few years. A quick Google search for the definition of best execution in FX will provide enough results to confuse anyone, illustrating the ambiguity and lack of global consistency on the subject.

As a result, many investment managers have developed internal guidelines to demonstrate to their stakeholders that proper attention is given to their trading process and that they are exercising care and diligence during the design of that process. While “best execution” definitions vary from one manager to the next, transaction cost is one factor that is most commonly considered central to the equation. The expensive and resource intensive efforts required to properly capture, measure and store the necessary data to evaluate execution quality in-house is causing investment managers to look at external partners to assist in this endeavor.

Although sell side firms, acting in a principal capacity, have no obligation to provide “best execution,” there are increasing levels of cooperation and ability to supply their clients with the appropriate data to enable the investment manager to perform proper analysis. Additionally, a slew of Transaction Cost Analysis (“TCA”) companies have developed meaningful solutions for firms looking for independent rate analysis and increased transparency by providing verification and reporting on execution quality. Lastly, external providers offer execution services that seek to provide quality execution with a focus on transparency as an alternative to developing an in-house trading desk.

While these services provide useful post-trade evaluation of execution quality, investment managers should realize that they are a complement, not a substitute, for a robust internal monitoring process.

Finally, by focusing purely on transaction costs, investment managers are missing other factors that play a key role in determining the overall costs related to managing an FX program. Factors such as speed of execution, netting opportunities, liquidity, custodial or other servicing fees and an array of operational considerations should all be taken into account.

An incorrect trade executed at a fair price may have a far greater negative impact than an accurate trade executed at a less favorable rate. Only with the appropriate controls, validations and detailed reports can one get comfort that the up and downstream workflows have been properly calibrated and implemented according to plan.

Regardless of a manager’s approach to FX, the ability to generate or obtain detailed, transparent reporting on the entire process should never be overlooked.


While this paper touches briefly on the components of a successful FX program, each one warrants a more detailed review in accordance with an investment manager’s overall objectives and strategy. No single FX process can be appropriate for all managers because each will fall in a slightly different position along the continuum of FX objectives. Regardless of where they fall, it is incumbent upon all managers to continually evaluate their FX programs against their own definitions of execution quality, operational efficiency, optimal calibration of program implementation decisions and transparency. Without measurement, a manager cannot ensure they are employing the most effective internal or external FX process, or confirm they are achieving optimal FX performance and providing value for their stakeholders.

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