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AlphaWeek Q&A: Beverly Doherty, Global Head of FX Connect, State Street

State Street and BestX recently announced a partnership whereby the latter will integrate into State Street’s FX Connect product, thus offering FX transaction cost analysis (TCA) globally. 

AlphaWeek’s Greg Winterton caught up with Beverly Doherty, Global Head of FX Connect, to discuss the current state of the TCA landscape for hedge funds.

GW: Beverley, thanks for taking the time today. TCA is still a relatively new concept so not all hedge funds – indeed, any funds trading liquid securities cross-border – have a TCA program in place. What do they need to consider when looking for a TCA provider?

BD: When looking at TCA providers, there are a number of factors that every buy-side institution needs to consider. The first one relates to the level of pre-and post-trade TCA analytics that are available – does your TCA provide depth of analytics and breadth of data and exposure to provide a comprehensive TCA? Any provider needs to have awareness of the entire lifecycle of the exposure, which is point at which the trader is aware of the exposure he/she needs to manage – not simply the point of execution. Another key factor to consider is how integrated the TCA product is to your execution and allocation platform(s) in order to capture the entire trade lifecycle. 

With FX Connect’s recent partnership with BestX we’ve taken what we consider to be an impressive set of TCA functionality that enables out-of-the-box integration between the two platforms and offers customers a turn-key integrated solution that supports the trading lifecycle, underpinning best execution policy evidencing and execution.  We also have existing partnerships with other TCA providers such as ITG and Elkins McSherry and are always happy to explore the possibility of integrating to any analytics provider out there if clients demand it.

GW:  For a systematic fund which does a lot of cross-border trading, these trading costs have a large impact on the returns, so keeping costs low is a high priority for these firms. MiFIDII requires that firms look at best execution from a holistic perspective, not just the cheapest option. How is that quantified, and has it affected the attitude of the buy-side to TCA?

BD: MiFID II defines Best Execution across 7 different dimensions, i.e. price, costs, speed, likelihood of execution, likelihood of settlement, size of trade and nature of the trade.  Although each buy-side firm will weight each element differently, evaluation of and transparency around each element is critical as they all impact trading costs.

We’ve seen the journey that organisations go on – there is a recurring theme of asset owners looking at the cost of execution or looking across their asset managers and arriving at the conclusion that there are significant costs involved in FX execution that can perhaps be handled better with a best execution policy. Now the evidencing of this policy has been enshrined in MiFID II and transparency around the cost of transactions will become more and more important going forward.  We have seen our clients at FX Connect particularly keen to implement sophisticated and robust TCA systems in order to understand their overall trading costs.

Functionality on FX Connect our execution and workflow platform and Trade Services, our post-trade and settlement platform, provides our clients with the ability to evaluate all these elements, and the recent bespoke integration between FXConnect and BestX not only includes the sophisticated models offered by BestX, but also enhances data around trade times, speed of execution and certainty of trade settlement to make it a unique offering.

Beverly Doherty
State Street's Beverly Doherty

GW: Unlike MiFIDII, the FX Global Code doesn’t impose regulatory requirements on FX market participants. Since it was launched in May 2017, what have been the main changes in the attitudes of the buy-side to their existing FX TCA programs?

BD: The Global Code of Conduct is a manifestation of the direction of the travel for the FX market, and what we are seeing among our clients is that because it is principles-based rather than enforced regulation, they are not just adhering to it but going above and beyond the letter of what’s expected. In practical terms this means that there is more of a focus than ever before on best execution and TCA.

GW: Hedge funds and CTAs are used to being examined from the perspective of their track records and management background. Now, as part of the investment due diligence process, investors are increasingly reviewing their service providers as well. How has the scrutiny for firms like yours changed over the past 5 or so years?

BD: Given what’s happened in the market over the past few years, with the allegations around the benchmark fixing and last look, the bar has been raised for all FX market participants – including - albeit indirectly in terms of regulatory obligations - FX platforms.  Fortunately our State Street parentage automatically makes us part of a Systemically Important Financial Institution (SIFI), which means we hold ourselves to the highest standards and can only do business with professional institutions that have been subject to strict compliance and regulatory scrutiny. For both our clients and partners, they can be assured that they are dealing with a trusted partner.

GW: What other areas of the Global FX Code would you urge hedge funds to brush up on, and why?

BD: The interesting thing about hedge funds is that they can be both clients and market makers.  The Global Code’s execution principles are particularly important here for hedge funds and Principle 9 deserves extra attention: “Market Participants should handle orders fairly and with transparency in line with the capacities in which they act.”  Since we’re talking about TCA, Principle 9’s discussion text indicates that market participants should ‘regularly evaluate the execution they receive.’  FX TCA, until even recently, was considered exotic.  Now it’s an intrinsic part of the job, not just for traditional long-only investment managers but hedge funds, too.  Hedge funds should expect their clients to ask about their processes on how they assess their FX executions.