Transaction Cost Analysis

Trust, but verify. A TCA is the most effective way to assess the quality of your FX execution (i.e., the exchange rates you are trading on from your FX provider). Actually, it is a central tenet to safeguard transparency in an asymmetric relationship, where one party has more information than the other (your FX dealer has more info. than you). Additionally, a TCA is fundamental to your FX trade execution process for ongoing comparison of the quality of your trade prices against the wider market, to demonstrate 'Best Execution' (see FX Global Code), and as evidence of good governance showing your stakeholders that you are protecting your firm's value against excessive, and usually hidden, FX costs.

Sadly, far too many corporations are under the impression that their FX provider is dealing with them in perfect fairness and absolute honesty. Our own, internal data shows us that nearly 100% of corporate clients actually have little to no knowledge and transparency on what their FX dealer is charging them in markup. In fact, a 2019 study by the IMF & European Central Bank proves that if you aren't a large, multinational with the sophistication afforded by having a Treasury team, then FX Dealers consider you increasingly unsophisticated the smaller your company is, and they will overcharge you by up to 26 times more than what they charge a larger, more sophisticated company. Ouch!

Depending on whether you deal with a bank or a broker, the process for determining what you will be charged is different in some respects and similar in others. In contrast to a broker, a bank, when calculating the sales markup on an exchange rate, will consider its own FX positions and exposures, and then starts skewing the price for each client according to their total value to the bank, their credit rating (e.g., Dunn and Bradstreet), and market conditions. For both banks and brokers (the latter uses the following to near exclusively determine markup), the most important factor pertaining to how much they will [over]charge you (and if they can, they will) is your sophistication! If you lack the resources of a multinational corporation, and would consider your Treasury FX expertise as being less sophisticated than that of a multinational, then the simple fact is that you WILL be charged more—much more—and this is why a TCA is so important for corporate treasuries.

Our independent Transaction Cost Analysis will compare your executed trade price against the actual exchange rate, finding those hidden costs and spotlighting your FX provider's attitude toward your business based on their "adjusted" spreads (i.e., fair shake or pillage and plunder). Most corporate FX deals transacted with a bank/broker offer the minimum in transparency on executed rates and times. There is usually no timestamp as to when the actual deal was booked on the market, no reference to the market rate at time of execution, no split in the "all in" pricing to show markup and forward (swap) points if applicable. Even worse, they will do their best to push you into non-linear products like vanilla/exotic/structured options because these are infinitely more difficult for you to price, which means they can make larger profits on those transactions due to the information asymmetry (that word again). Our TCA can help place an accurate value on these deals, past and present, and the costs associated with them.

FX trading costs directly hit a company's bottom line. For example, exchanging $1,000,000 USD at a USD/CAD rate of 1.3000 when the true interbank rate was 1.3100 just cost your company $10,000 on one transaction! For an at arms-length transaction, which is pretty much the business model of every bank's corporate FX trade floor and is the only modus operandi of every FX broker, this would equate to a huge, unwarranted and undeserved fee! This directly and negatively impacts your operating margins through inflated COGS or and/or deflated revenues, but you will never receive a bill showing you the real cost. Without knowing how much your foreign exchange operations are actually costing you, it follows that it is impossible for an accurate and detailed evaluation of your FX provider(s) to be performed to hold them accountable.

In All Probability

You asked, we delivered! At Bastion we're always looking to improve our products and processes based on feedback from our clients and one suggestion that consistently had been at the top of the heap from both existing and prospective clients was "useful, timely & actionable currency intelligence." Thus began our journey into developing our "In All Probability" weekly FX product. It took some time as we scoured through reams of industry reports from banks and brokers, many of which were provided by you, to get an idea of what was lacking, and with your guidance and feedback we released our inaugural "currency intelligence" product at the beginning of 2020.

Our major findings and your major gripes with existing industry products were basically the same. By far and away the main issue was almost every single report from both banks and brokers loved to talk in great detail about economic data, but never talked about how this information was actionable to you, the reader. And all the so called reports that focused on the upcoming week or month, suffered the same existential problem—they described upcoming events of interest, but never explained how these are relevant to currency markets, or what the potential impact is on the exchange rate. So, unless you have a burning desire to read staid economic reports because that's what all these bank/broker reports are, you're chasing your tail in hopes of finding actionable currency intelligence that will help your business.

Another major headache most of you had were the products you received came too often (e.g., daily, intra-day) overwhelming you with a constant stream of information, that generally wasn't applicable to your situation. The flip side of that was the products were not timely enough (e.g., monthly, quarterly), where anything actionable was stale by the time of receipt. This led us to the happy medium of choosing a weekly product that was frequent enough to keep you abreast of foreign exchange developments, but also delivered to you at the end of the week allowing you to catch up over the weekend and get a view on events in the coming week, but at a time when urgent business matters weren't a pressure. So far, we haven't had any requests to change the frequency, so thank you for steering us in the right direction!

For those relying on products from banks, you told us they are hard to read and understand. This makes sense because bank reports are geared toward a 'financial market savvy' audience (e.g., mutual funds, pensions funds, multi-national corporations, etc.) rather than targeting corporate needs, especially those of small medium enterprises. Having poured over so many of these products as we analyzed them to see what they were missing, it was quite clear that these products lacked readability for the corporate audience as they got bogged down in the minutiae and jargon of financial markets. There are also way, way too many bank reports on every piece of economic data and event, spread out all over the banks' websites making it a nightmare to quickly and easily stay on top of market trends that are relevant to you. On top of that, most of the reports play it very safe by talking just about the data, preferring to steer clear of saying anything useful such as how they see events unfolding and what that means for you when it comes to effects on the exchange rate. Summing up bank reports for corporate users in one word: useless.

On the other side of the coin are products from foreign exchange brokers, which nearly all of you derided as lacking any real substance, especially about foreign exchange related matters. When we parsed reports you sent us that covered most corporate FX brokers in Canada, we also found, just like you told us, that they skirted mentioning exchange rates directly, which was interesting as the reports had no problem writing about non-FX market prices (e.g., oil, stocks, gold, etc.). Most of these reports were daily updates that gave quick, uninspiring briefs of economic data releases prior to the update, but in such a broad sense that you would be better served by looking at an economic calendar, which would give you the same information in a quicker, more organized fashion. Like most of you, we aren't really sure what the point of FX brokers' daily updates were other than as some kind of marketing/sales gimmick to promote brand awareness because they certainly weren't informative, let alone actionable as they rarely talked about exchange rates! If one had to choose between bad and worse, banks' reports were the "better" products for information, yet still lacked corporate relevance.

After analyzing many different reports, we clearly understood your frustrations, and not just because you shared that with us. This culminated in the development of the weekly FX product, "In All Probability," that is more or less what you subscribe to today. There have been tweaks to the product since being released as we take your advice about what you need just as seriously as you take our advice on currency matters. Since inception, the product has excelled at meeting your needs despite some minor modifications (we expect it to evolve as your needs change), and we are certain it will continue to do what asked for: offer you a positive return on your FX by giving you the unvarnished, currency truth to empower you to make smart, informed decisions that help you manage you FX professionally with just a helping hand from us—once a week.

Your ask: timely, relevant, actionable information without bombarding your inbox, and a focus on currency & related market topics that are germane to a corporation's needs.

Per your requests:

• Easily digestible information tailored to non-financial market professionals
• Clear, concise advice and commentary that actually tells you what to do and why. No double-speak.
• Price targets for both importers and exports for the week and month ahead for conservative and aggressive approaches
• Expected trading ranges with a corresponding probability to help you fine-tune price expectations
• Hedging recommendations inclusive of rational, price targets and hedge ratios
• Economic assessments and calendar to explain events that may impact near-term currency pricing to your benefit or disadvantage