Just has benchmarked trades valued in billions USD for global companies, who buy and sell in multiple currencies. What we have learned is that companies, particularly importers and exporters, are routinely subject to excessive FX trading costs.
We have also learned that benchmarking trades is a critical part of controlling those FX Costs. Here's why we think FX benchmarking is important.
Banks hide FX costs and overcharge corporate customers for FX trades
Banks all around the world charge their corporate customers high FX fees, and in some cases, they do not even provide the rates agreed with the customer.
For example, a 2019 report by the European Central Bank on pricing of OTC derivatives showed that the majority of non-financial FX participants pay up to 25 times more to hedge their FX exposure than the most active, sophisticated firms. This was based on an analysis of more than half a million EUR/USD FX forward contracts traded between 204 banks and over 10,000 corporates, from large multinationals to small import-export companies. The report concludes that banks treat a small group of select clients favourably, while engaging in systematic price discrimination against businesses they deem to be captive or unsophisticated.
A margin agreement can’t provide protection if it is not followed and enforced
In North America, in September 2021, the US government announced a 72.6 million USD settlement with Wells Fargo because the bank defrauded 771 business customers by charging then higher rates that what was agreed in margin agreements. The investigation found that the bank would:
- “charge inflated spreads that were as large as the FX sales specialists thought they could get away with”
- look at rates across an entire day to pick the best rate for the bank and the worst rate for the customer, and use these rates for the spread (Wells Fargo called this “Range of Day” pricing).
- make intentional “errors” and “if caught the FX sales specialist would falsely claim that the digits in the price had been mistakenly transposed (or what Wells Fargo called the “Big Figure Trick”)
- charge higher fees to customers that “representatives thought to be less sophisticated or experienced in FX trading” (or what Wells Fargo called “User-Based Pricing”)
- give customers false explanations for inflated prices
These practices led the US government to state that “For the better part of a decade, Wells Fargo abused this trust, using tricks, false information, and other deceptive practices to fraudulently overcharge customers who used the Bank’s foreign exchange service.”
Banks hide extra FX costs in their quoted rates
A key tactic banks use to hide the higher costs is that they include the costs in the rate quoted to corporate clients and don't reveal their true margin. It is routine for significant margins to be applied to the quoted FX rate by the bank’s sales desk. A company’s relationship manager for placing an order may not even be fully aware of the size of the markup. FX analysis conducted by Just Technologies, a leader in FX cost analysis, found that markups range from 7 to 70 times the bank's cost of risk and execution.
Banks price discriminate at all volume levels of FX flow
In a transparent market, there should be a correlation between the volume of a company's FX flow and the rates it pays. But companies who monitor their FX trades find this is very frequently not the case, and that FX discrimination occurs at all volume levels. This lack of correlation suggests the rates paid by corporates have less to do with their traded volumes, and more to do with how well informed they are. There is a remarkable slack of transparency in FX pricing for corporates, as most do not don't monitor the pricing they receive.
Successful treasury teams use FX analytics tools to monitor FX
The hidden costs in the corporate FX market has meant that FX analytics software has steadily become a key part of the must-have tools in treasury operations. Treasury teams are starting to seek out independent FX analytic solutions to enable them to understand their true markups and how different banks apply those markups across different currency pairs and FX instruments.
FX cost analysis typically involves comparing the rate of corporate FX trades against the best rates quoted on the market, and assessing trends across multiple industries, dozens of currency pairs, and at least two years of historic data.
There are many benefits in the use of FX analytics software for trade costs analysis (TCA):
- You can slice and dice your margins in many ways to understand the factors that impact your rates. For example, you can compare charges across several banks or your subsidiaries, or see analyse your rates by currency pair and tenor length.
- You have quantifiable evidence to use in conversations with your bank. Companies who use FX analytics software often find that all they need to do is show the data to the banks and the banks are immediately ready to adjust pricing, so the conversation quickly moves to correction.
- You can get better rates. Banks routinely offer better rates to companies that use trade cost analysis (TCA) in discussions about their FX rates.
- You can keep rates low. Negotiating a good rate is just the start. Ongoing FX analysis and monitoring can help you catch situations when rates are creeping back up or worse yet, when rate agreements are ignored.
- You can show you have FX management under control. Analyses and reports enable you to demonstrate that you have control of FX costs to colleagues, executive teams and the board. They also enable you to show compliance with your company's FX policy.
Helping corporate treasurers fight price discrimination and access fair pricing
Fortunately, there is an easy solution for businesses that care about being treated fairly and saving on cost - incorporate ongoing FX monitoring into the best practices of treasury operations. As the researchers note in their study, having access to pricing benchmarks, FX analytics and trade cost analysis (TCA) gives the potential to significantly reduce information asymmetry and price discrimination.
Our global corporate clients have reduced their FX costs by as much as 80% and, and are maintaining those savings through ongoing monitoring.
Would you like to reduce your rates or learn more? Contact the Just team.