premium of selling a 24hr put or call option pro-rated
for the amount of time the liability exists. In the context
of an execution framework, netting is still beneficial,
either cross-currency or same currency, however this
benefit diminishes over time and typically with an hour
from when the FX liability was created.
The need and benefit to netting transactions
becomes suboptimal if the waiting time extends
beyond a reasonable amount of time and the order
is exposed to market volatility. The poster child for
this type of implementation shortfall is clearly the
day the SNB pulled out of the EUR/CHF and USD/CHF
market, leading to a 25% appreciation of the CHF in
a short amount of time. What’s the point of netting
a transaction to reduce spread risk when the market
has moved to that degree? A frequent response
from the buy side tends to negate this volatility risk,
typically along the lines of sometimes this favors the
underlying account, and sometimes it doesn’t, but it
all comes out in the wash. By identifying each fund’s
unique execution benchmark, however, their best
execution process can be managed and the benchmark
risk reduced inherent to any underlying currency
transaction.
Winter/Spring 2020
Different in many ways from an algorithmic strategy,
automated execution workflows can simplify and
accelerate the execution process. The execution of
the low-touch orders can be completely automated
within FX Connect and managed via a number
of user defined rules. Execution parameters may
include counterparty restrictions and minimum
number of banks quoting, as well as aggregated
spread. Even in the context of potentially high
levels of automation, the trading oversight can
be managed from an entirely hands-off viewpoint
to a fully managed process, all the while creating
execution efficiencies for the trader. When
synthesized with the underlying security transaction,
automated execution can significantly reduce both
operational and actual implementation shortfall.
However, the measurement and refinement of any
execution process demands independent analytics
to implement a justifiable and repeatable execution
process in accordance with market and regulatory
evolution. To help complete the execution lifecycle,
BestX, the industry standard for FX TCA, operates
independently within the FX Connect GUI, and
allows clients’ access to the feedback loop critical in
evaluating and improving execution performance.
www.buysideintel.com
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