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Outsourced FX Solutions to Meet Client Needs

John Burke, Head of eFX for Northern Trust Global Foreign Exchange, explains the key considerations that asset managers need to be aware of when considering outsourced FX management services.

Q&A displayed as featured in e-FOREX, May 2022

For buyside firms, utilising third-party providers to outsource elements of middle and back office functions is now considered good business sense. Yet a growing segment is also reaping the benefits to be gained by turning to a market-leading provider to help manage their FX risk as well.

Why does managing FX still present significant challenges for many asset managers?

In an increasing world of regulatory oversight, global portfolio allocations and cost pressures, asset managers are naturally looking to increase their business operation efficiency and mitigate risk. Managing FX exposures touches on numerous processes within an asset management operation. It may be trades to fulfil security transactions, hedging currency risk, dividend repatriation, offshore management fee payments, or other. All of these create an extra layer of complexity, adding risk to the business and detracting focus from core investment decision making competencies.

Why are increasing numbers of institutional investors and asset managers looking to delegate their hedging needs to leading FX providers like Northern Trust?

Managing a FX hedging program for a portfolio with global allocations has historically been completed using frail processes, rudimentary calculations and non-specialised technology and trading teams. As assets under management grow, investor demand for foreign assets and the need to offer share classes across additional currency bases  have increased so has the complexity of the requirement and subsequently the expertise required to run such a hedging program. Operationally, this brings in notable risk and is often limited in scalability.

Providers of outsourced hedging services have dedicated technology to take in malleable data from a variety of sources. The governance surrounding the in-take of data and subsequent deal determination has only increased in recent years, with machine learning now being leveraged to proactively identify issues.

In order to outsource a hedge program, the provider must be accommodating of bespoke requirements both at a portfolio and asset level. This, however, is only the tip of the iceberg; service providers are now able to produce detailed, on-demand reporting to highlight drags on performance, whether it be due to volatility or otherwise. Subsequently, this enables discussions surrounding reducing performance drag. For example, solutions such as the staggered rolling of hedges or equitization of unrealised hedge PnL are now leading the discussions Northern Trust has with clients.

What do you see as the key benefits and value proposition of outsourced FX solutions? Is it mainly about reducing costs and freeing up managers to focus on the things which they do best?

Conversations with clients and prospects alike have highlighted the requirement for a tailored approach to each partnership. The biggest value of an outsourced solution varies; for some clients a complete segregation of the FX responsibility is operationally ideal and also enables fund managers to focus solely on alpha generation. Alternatively, some clients may not have the desire to retain the expertise to run an operationally complex hedging overlay program and the associated costs of running such a desk may be unfeasible. For some, the ability to rely on transparent executions and regulatory reporting is most important. Generally, for those managers who are unable to operate a large scale dedicated trading desk and the associated operational workflows, the reduction in cost and risk is a standard expectation.

What sort of red flags might indicate to an asset manager that they should consider an outsourced FX solution?

As workflows become more complex, it is natural that managers and operations managers look for new technologies and ways to operate more efficiently. While beneficial in many capacities, if large volumes of deal determination are being completed on spreadsheets prior to execution this often suggests there is a large potential for avoidable errors. Similarly, this and other processes can be hugely time consuming whereas many managers would rather focus on pure investment related items. There may also be an element of cash management involved if asset managers prefer to reduce cash drag, e.g. by utilising Northern Trust’s Automated Income Sweep service, proceeds from dividends and other income can be predicted and executed for the value date of the income delivery.

Obligations pertaining to trade performance such as Transaction Cost Analysis may be proving burdensome, especially where FX is executed at numerous custodians and directly with counterparties. Transaction data and its format will often deviate by counterparty and so centralising this execution in a transparent scheme can be instrumental in demonstrating to clients the cost efficiencies of execution. This is highlighted through Northern Trust’s Complete FX service, whereby trade requirements can be collated from various sources and workflows. Execution options include algorithmic execution and benchmark services as per the manager’s requirement. This brings with it potential implicit and explicit cost savings through the cross-fund netting and enables managers to easily demonstrate the costs to an underlying asset owner.

What are the key components of Northern Trust’s holistic FX outsourcing solutions and how flexible are they to meet different client requirements?

Northern Trust has several modular services which have recently seen an increase in clients requesting amalgamation of the different product verticals. This extends beyond FX. By pairing Northern Trust’s Integrated Trading Solutions with our Complete FX offering, clients can outsource their equity and fixed income transactions and any associated FX to the transaction. Subsequently, any FX requirement from either a Northern Trust function or any other global custodian, can all be patched through to the in-house execution system. Compressing multiple third party tickets also reduces transaction fees through the Complete FX module. Likewise, outsourcing subscriptions and redemption transactions through transfer agents and top of this, fund managers can, where required, input trades directly into this workflow and therefore benefit from the netting and execution benefits.

This becomes powerful where an asset manager is able to net large volumes of differently sourced flow to maximise cost savings and reduce market footprint. Funnelling flow into a singular source also helps reduce operational issues as there is a defined trail of the workflow. The true value of Northern Trust’s outsourced solution comes from its scalability and connectivity with other securities services. Being able to outsource services across the middle and front office allows managers to be as engaged as they’d like, if at all.

What factors are important in determining which solutions are the right fit for a specific client?

Through partnering with clients, discussions often revolve around where the pain points lie within their unique workflow. Outsourcing has historically been focussed around back and middle office, however clients are looking more to redistribute processes where there is little or no value-add factor or specific issues reoccur. For example, an asset manager may be best centralising FX’s following security transactions across their custodians automatically. It may arise from a desire to run a hedging program but without the in-house expertise required, or even the desire to have a custom execution algorithm.

Execution algos are starting to become more prevalent in FX. In what ways is Northern Trust combining them with FX outsourcing solutions to deliver more workflow efficiencies?

Combining the full suite of services into a sole execution is often an excellent way to net trades and reduce market footprint. Having an automated pre-trade workflow which captures multiple streams enables clients to accurately track trades from start to finish; executing via an algorithm in this sense is the pinnacle of a smooth outsourced operation. Defined at each stage by bespoke parameters, execution algorithms enable clients to trust their FX transaction is being executed in a commercial way with a targeted liquidity panel, with transparency being the core of the service. After the transaction, post-trade reporting and connectivity to major Transaction Cost Analysis providers is valuable for all stakeholders involved in the transaction.


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.

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