The survey asks asset managers and banks to rate their custodians across a range of categories, including the transparency of foreign exchange transactions undertaken by the custodian. RBC Dexia received the highest average score, followed by State Street in second place and Citi in third.
"We understand clients' need for clarity and transparency and over 5 years ago, RBC Dexia anticipated and launched its transference FX model, offering client buckets and benchmarks," says Morgan McDonnell, head of FX markets & product at RBC Dexia Investor Services.
"With market developments, we are pleased that our consistency of approach continues to be recognised by the asset management community."
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| Source: Global Investor |
Respondents are asked to rate their global custodians from one (very poor) to seven (flawless) in each of the categories. The respondents are also asked to state how important they consider the service to be, from one (very unimportant) to seven (very important). The rating of the custodian in the former category is multiplied by the importance that the respondent attaches to that category to produce a final score, with a maximum possible score of 49.
In rating service categories, nearly two thirds of respondents rated transparency of FX rates as a six or seven in terms of importance to them.
Foreign exchange was an area some respondents felt custodians could drive improvements.
“Executing FX should be performed with counterparties of an investor’s choice,” says one leading asset manager. “There are several markets where this is not the case and we understand that this is market-driven and not the fault of the global custodian. However, we would like the global custodian to lobby for changes.”
The issue is that the transactions are executed at a different point of time than when the security is traded, creating challenges with matching benchmarks.
“We do not feel the rates are always as competitive as they could or should be, therefore adversely impacting the shareholders,” says the asset manager.
TCA takes off
Investors have become keen to monitor their foreign exchange costs with far more scrutiny after the recent allegations against several institutions of deliberately applying uncompetitive exchange rates to their clients’ currency transactions.
Financial consultants and brokers have responded by offering transaction cost analysis (TCA) tools in FX to institutional investors.
Global asset consultancy Mercer recently launched a service to allow institutional investors to monitor the costs involved with FX transactions, while agency broker ITG also launched a similar tool for FX, to complement its existing TCA products in equity markets.
TCA systems enables investors to review spot and forward FX transactions undertaken by an intermediary, which can then be mapped against publicly available market data, from external sources such as Bloomberg, to determine the competitiveness of those transactions.
In an ideal world, each trade executed by a custodian or currency manager would be time stamped allowing for direct comparison with market prices at that specific time, though many custodians do not offer this to their clients.
In the absence of time stamped data, systems such as Mercer’s compares each currency transaction with the range of exchange rates for that day.
Investors are then able to monitor the currency transactions executed by their custodians and compare them with the daily trading ranges for the currency pair in question.
Any currency transactions executed on an exchange outside of this range are immediately flagged up. Over time, a client receiving best execution from their custodian would expect FX transactions to converge around average daily exchange rates.