Best execution: Beyond competitive pricing and transparency

Best execution is one of the most commonly used terms across financial markets. Many believe that it just refers to pricing, but as recent events in the banking industry demonstrate, there are other important considerations that you shouldn’t take for granted.

When assessing the overall FX execution quality and execution governance in the context of best execution, it is important to consider a wide range of execution factors to determine the optimal execution arrangements that can help a firm achieve a best execution on a continuous basis.

• Importance of pricing in FX
• Counterparty Risk Assessment Framework
• Execution contingency plan

 

Importance of pricing in FX

It is widely known that execution prices and costs are probably the most important execution factors in a normal market environment.

We believe firms should seek to achieve competitive execution prices and transparent cost structure. They can do this by adopting a multi-bank FX execution platform where multiple liquidity providers are competing to provide exchanges rates. This enables them to transparently compare and execute FX rates from multiple providers. The execution prices and costs can be accessed and monitored via an independent Transaction Cost Analysis (TCA) to demonstrate best execution.

 

FX counterparty Risk Assessment Framework

However, as the recent events with Silicon Valley Bank and Credit Suisse illustrate, other execution factors beyond pricing and costs can play a significant role.

For instance, the likelihood of settlement typically becomes the crucial execution factor when counterparty risk dominates the market.  As a result, selecting and performing appropriate due diligence on counterparties become an integral part of the best execution.

Firms should consider establishing a robust counterparty risk evaluation framework that considers of a range of risk factors, including:

• Monitoring realised and unrealised profit and loss (P&L) for each counterparty
• Credit rating from reputable rating agencies
• Credit default swaps
• Regular counterparty review and monitoring activities.

 

 

Execution contingency plan

In addition to reviewing and assessing the counterparty risks, the recent banking crisis events also highlight the importance of establishing a robust FX execution contingency plan that takes into account of legal and operational complexities.

If the counterparty becomes unavailable, the firm should be able to quickly and efficiently manage the existing FX trades by way of:

• Novation - replacing an agreement in place with consent of all parties involved
• Close-out - termination of the transaction
• Implement Net Present Value (NPV) any future profits

Once existing trades have been managed, firms can then implement new FX trades as required by the business.

 

How MillTech can Help

MillTech was born out of Millennium Global Investments, considered one of the founding firms in currency overlay,

Our multi-bank market not only can help firms significantly reduce both FX costs and operational burden associated with FX execution and rolling hedging requirements, but also significantly reduces counterparty risks. This is because we offer multiple arrangements with tier one banks (if available) within a rigorous MillTech counterparty onboarding and monitoring framework

We provide access to a transparent marketplace for comparative FX execution from up to 15 tier-one counterparty banks, while harnessing a unique and significant pricing efficiency for our clients In addition, MillTech provides clients with full transparency of execution via independent TCA reporting.

Get in touch today to find out more.