Skip to content

Subscribe to Asset Servicing & Fintech Insights

Discover more information in our monthly publication, the AXIS newsletter, including industry trends, product innovation, Fintech and more from our team of experts.

Three Key Reasons Why FX Currency Management is Driving Front Office Outsourcing

We explore why outsourcing FX currency management may help achieve operational resiliency, reduce risk and enhance performance while saving costs.

The COVID-19 pandemic has intensified the challenges faced by asset managers and asset owners to manage and mitigate the impact of currency volatility in their global investment portfolios. COVID-19 presented a perfect storm of challenges. On the one hand rising volatility triggered unprecedented shifts in net asset values (NAVs). At the same time, pressures to focus on core alpha activities meant currency hedging activities were sometimes set aside for those lacking automated solutions. This brought to the forefront the question of, should FX currency management be kept in-house, or outsourced? In this article, Northern Trust’s head of Currency Management, Andy Lemon, discusses three key reasons why an outsourced programme should be considered.

The backdrop

Even before COVID-19, asset managers and asset owners were increasingly looking to outsource currency management as part of their front office rationalisation. Aside from cost pressures, chief operating officers and chief investment officers had been challenged to meet the pressures of rising regulatory requirements and technology resiliency. This latest front office outsourcing trend followed the previous distinct cycles of back and middle-office outsourcing.

The COVID-19 pandemic has exacerbated these challenges. What was once regarded as a non-core function has been shown to have the potential to significantly impact overall portfolio values if not set up effectively– testing business resiliency plans. The following considerations illustrate the potential advantages of an outsourced currency management programme.

Number 1: Achieving operational resiliency and risk reduction through automation

During the pandemic, transaction volumes ballooned due to increased market volatility causing substantial changes in NAV valuations. Some asset managers hit a capacity spike and were unable to cope due to their reliance on manual processes – leaving portfolios exposed to the rapidly changing currency fluctuations. Even in normal trading conditions, an overreliance on manual processes provides a heightened risk of trade and calculation errors and can detract from alpha generating activities. This has been an incentive for  many managers who were challenged to seek outsourcing specialists who are able to handle a large volume of transaction with automated systems. Meanwhile others with little exposure to global currency fluctuations or managers who have already heavily invested in technology may still retain these as they can justify the ongoing investment in internal resources and technology to operate and may still be content to keep an in-house operation.

Automated market triggers

For firms looking to outsource, they should consider an outsourcing provider which can offer a customised parameter set execution model. This means hedging activity can be automatically set in response to established market triggers, removing the burden of responding to dynamic market events – from minor fluctuations to large- scale unanticipated global events such as COVID-19, or a global market shock.

Under this arrangement, the provider’s system makes decisions based on market information, so it’s not discretionary. However, it can be viewed as a passive/active solution. It is passive as the asset manager or asset owner doesn’t have to keep asking for changes. The activeness reflects execution being based on customised, pre-determined guidelines agreed with the asset manager or asset owner. So, if their FX rate moves from 1 to 1.10, that triggers a different hedge ratio and the provider will execute based on those terms. The third-party provider is the active partner, but from the client’s perspective it’s more hands off. As it’s based on an agreed logic the set execution model removes the investment decision burden from the client while giving them the flexibility to change the parameters.

An outsourced provider may also be able to offer greater access to scalable technology such as machine learning models designed to enable greater oversight of thousands of daily data points that can help manage risk throughout the currency management lifecycle.


The timing of trades is also key to resiliency and optimum performance outcomes. For example, an asset owner based in Australia may be executing deals in the US, which could result in a delay between the valuation point of the fund and when the execution happens. The time lag exposes the asset owner to risk and may impact performance.

This risk can be mitigated by using a 24/7 provider which can execute closer to the fund’s valuation point. Having an effective currency hedging programme can minimise the FX spot’s impact on the portfolio’s non-base currencies – it’s not just about operational efficiencies but also optimising performance returns.

Number 2: Oversight and governance through greater transparency

Asset managers and asset owners need to demonstrate enhanced oversight and governance of the impact of FX movements across their portfolios to meet regulatory, investor and board expectations. This means being able to track adherence to target hedge ratios view unrealized P&L and understand performance divergence.

Having an outsourced provider does not discharge asset managers or asset owners from their regulatory / governance obligations. However, it may provide the detailed transactional data to make it easier for them to fulfil these obligations but without the operational risk. Part of this is providing detailed reporting by directly interacting with a client’s systems through a variety of communication channels. These can include traditional routes such as excel or CSV files via email or direct connectivity via application interfaces such as APIs, Secure File Transfer Protocols, or online tools. Some providers, for example, may offer digital visualisation tools to enable their clients to view their performance analytics via interactive dashboards directly from their desktops.  Asset managers or asset owners can drill in and  gain comfort for the various reporting layers within their organisation, be that operations management, CIO, or risk management. This enables them to regularly assess their performance and adjust their hedge ratios or other hedging parameters as well as utilise to explain divergence to investors. However, on the other hand oversight and governance factors may also lead some asset owners and asset managers to prefer to keep all aspects of their FX requirements including their FX currency management programme in-house to have full control. While asset owners and asset managers have responsibility for their oversight requirements, it doesn’t have to be an operational burden.

Benefits of a single provider rather than multi-manager approach

A number of asset owners adopt a multi-manager approach to their FX currency management. This may cause potential performance analysis issues due to receiving multiple reports in different formats. Outsourcing to a specialist provider enables asset owners to receive a single report that provides a total portfolio view to make it easier to oversee as well as the ability to work with a dedicated provider to enhance the overall performance.

Number 3: Reducing cost by delegating non-alpha activities

Consolidating to one external provider also enables asset owners to benefit from potential cost savings.  An asset owner may have as many as 80 managers performing currency management functions. Some may prefer to keep a panel of providers to benchmark against and gain a variety of approaches. However, this means a significant number of different FX currency hedges which may take opposing market positions. By consolidating with a specialist provider, netting benefits can be realised by consolidating currency transactions.  It may also assist in reducing the resourcing pressure to benchmark currency portfolio performance due to the single view. Delegating currency management to a specialist provider rather than the fund manager may also potentially lower fees by removing a non-core asset manager activity.

From an asset manager’s viewpoint outsourcing also has cost benefits.  For very large managers with extremely high  FX currency transactions, the large volume of trades may provide the potential to net off positions, ultimately saving in transaction costs.  But for other managers building a whole system workflow around transactional FX when it can be outsourced may not be justified. Running your own currency management operations entails staffing, system, regulatory reporting and legal expenses. While it is feasible to set up an automated solution in-house, it can  involve a large  capital spend, not only the initial capital costs , but also ongoing the maintenance costs. Having an in-house operation may also divert traders’ focus from key alpha generating activities.

Looking forwards

An effective currency management program is key to managing and mitigating against portfolio currency risk for both asset managers and asset owners.  While COVID-19 has heightened the focus on outsourcing the currency management desk, the pressures driving outsourcing will continue as we embrace a ‘new normal’. While some asset managers and asset owners may elect to retain this function in-house, recent market events have shone the light on what has sometimes been regarded as an ancillary activity by demonstrating the importance of customised automated solutions able to deal with market shocks and fluctuations 24/7. They have also highlighted the need to have a transparent view of the currency management portfolio to meet governance and risk oversight requirements and make  evidence based  decisions to  adjust the program’s parameters to optimize performance. Moreover, an outsourced arrangement can help reduce costs across the spectrum of fees, staffing and technology investment. In conclusion, a decision to outsource to a  currency manager may help fund managers and asset owners achieve operational resiliency, reduce risk and enhance performance while reducing costs.


This marketing communication is issued and approved for distribution in the United Kingdom and European Economic Area by The Northern Trust Company, London Branch (‘TNTC’) or Northern Trust Global Services SE (‘NTGS SE’). TNTC is authorised and regulated by the Federal Reserve Board; authorised by the Prudential Regulation Authority; subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. NTGS SE is authorised by the European Central Bank and subject to the prudential supervision of the European Central Bank and the Luxembourg Commission de Surveillance du Secteur Financier.

This communication is provided for the sole benefit of clients and prospective clients of TNTC and/or NTGS SE and may not be reproduced, redistributed or transmitted, in whole or in part, without the prior written consent of TNTC and/or NTGS SE. Any unauthorised use is strictly prohibited. This communication is directed to clients and prospective clients that are categorised as eligible counterparties or professional clients within the meaning of Directive 2014/65/EU on markets in financial instruments (‘MiFID II’). TNTC and NTGS SE do not provide investment services to retail clients. This communication is a marketing communication prepared by a member of the TNTC or NTGS SE sales & trading departments and is not investment research. The content of this communication has not been prepared by a financial analyst or similar; it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. This communication is not an offer to engage in transactions in specific financial instruments; does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of individual investors.

Andy Lemon portrait

Andy Lemon

Head of Currency Management, Northern Trust
Andy Lemon is the Head of Northern Trust’s Currency Management team and is based in London.


Related Content

When it comes to FX automation solutions, one size does not fit all, but firms can find the right mix for their own FX programs.

A report summary of insights from discussions with traders and operational professionals in collaboration with The Finance Hive.

Confidentiality Notice:  This communication is confidential, may be privileged, and is meant only for the intended recipient.  If you are not the intended recipient, please notify the sender as soon as possible.  All materials contained in this presentation, including the description of Northern Trust, its systems, processes and pricing methodology, are proprietary information of Northern Trust. In consideration of acceptance of these materials, the recipient agrees that it will keep all such materials strictly confidential and that it will not, without the prior written consent of Northern Trust, distribute such materials or any part thereof to any person outside the recipient’s organization or to any individual within the recipient’s organization who is not directly involved in reviewing this presentation, unless required to do so by applicable law.  If the recipient is a consultant acting on behalf of a third party client, the recipient may share such materials with its client if it includes a copy of these restrictions with such materials.  In such event, the client agrees to comply with these restrictions in consideration of its accepting such materials.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret) [VAT if applicable], address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.