In a bid to cut its currency trading costs, Eastspring Investments has been working with ITG on the agency broker's transaction cost analysis (TCA) product for foreign exchange. The offering has been rolling out in Asia in recent months.

TCA has long been used by asset managers for equities in the region, but not for other asset classes such as foreign exchange, says Richard Coulstock, Singapore-based head of dealing at Eastspring, the Asia funds arm of UK insurer Prudential.

As Asian investors become more sophisticated, measuring costs across non-equity asset classes is becoming more important, he argues, particularly in the wake of high-profile lawsuits brought by US pensions against custodian firms such as State Street and BNY Mellon in recent years.

“This is about making the internal process as efficient as possible and, externally, getting transparent and measurable outcomes from each counterparty, particularly from custodians,” says Coulstock.

Eastspring has been collaborating with ITG for several years; the partnership started with the broker's equities TCA product. Hence ITG asked the firm, among other asset managers across Asia, Europe and the US, to help it test the FX TCA offering. Eastspring was its primary beta client in Asia.

TCA is designed to help investors measure execution performance and to reveal implicit execution costs (the cost of delay if an order is not executed immediately, for example).

And while ITG launched FX TCA in the US in April last year, it has not previously offered it in Asia, so Eastspring and ITG see it as the right time for such a service.

Coulstock’s team is specifically focusing on costs within transactions done by custodians, called 'standing instruction trades'. In these trades, asset managers are usually advised on the FX rates only after the trade is executed. The custodians then study asset managers’ funding requirements and try to meet their FX trade needs.

Historically, the custodian is under no obligation to give a time stamp on these FX trades. As such, they are often viewed as lacking transparency. Market participants say this is what led pension funds in California, Florida and Virginia to allege that BNY Mellon and State Street had overcharged them for FX trades.

Indeed, US and European asset managers are more interested in TCA than their Asian counterparts, “perhaps [due to] the publicity given to law suits around the handling of FX transaction by custodians”, says Ofir Gefen, Asia-Pacific head of research and liquidity management at ITG.

As part of ITG's global FX TCA initiative, the firm is working with 14 providers of FX data, including eight of the top ten FX dealers and three global FX crossing network operators.

“As FX trading is essentially an OTC market, it is critical for a TCA product to have multiple data sources so we can put together a relevant picture of the tradable quotes at the time the transaction took place,” says Gefen.

“This information allows ITG’s FX TCA to calculate various benchmarks, which are then used to value or measure the transaction relative to those benchmarks.” This analysis will ultimately help institutional investors improve execution and lower costs, he adds.

However, not all TCA equity analytics are applicable to FX.

While execution outcome and trader performance in listed equities can be measured against time-stamped exchange data, FX transactions are more complicated due to their distinctive market structure and price discovery process. They therefore require extensive care and a detailed thought process, Coulstock says.

“In FX, for example, asset managers need to be cautious of the various idiosyncratic market characteristics down to each specific fund level, and be cognisant of the time zone differences that affect currency trading globally,” he notes.

Coulstock expects Eastspring to publish a counterparty-specific FX report in the next quarter, offering currency pair analysis and information about his team's performance against different benchmarks.

The report will also offer asset managers an idea of FX transaction costs. Asset managers often do not account for the currency movements from the time the securities are traded and the time the FX is converted into account. These costs add up, Coulstock says.