On June 4th 2019 the European Central Bank (ECB) published a paper titled “Discriminatory Pricing of Over-The-Counter Derivatives” that we recommend as interesting reading for Finance leaders wondering if they are being charged fairly to hedge FX.

In conclusion, the authors demonstrated that foreign exchange (FX) dealers, including major high street banks and FX brokers, are systematically and consistently overcharging corporate clients who lack currency trading expertise. In some cases, fees are as much as 25 times higher for certain clients currency hedging trades.

FX hedging costs will always vary slightly between clients due to factors such as trade size, type, liquidity, tenor and counterparty creditworthiness. However, we frequently observe large price differences for currency hedging trades between clients of seemingly similar credit standings entering into similar transactions of equal size.

Please see the journal link here, or an FT.com summary here

How much should FX hedging cost?

There is an inherent conflict of interest between the two opposing parties in an OTC transaction. On the one hand, you have banks and FX brokers whose business, and incentive, is to offer the widest spread the client will accept in an attempt to maximize their profits. On the other side, corporate clients want to reduce their cost of FX hedging to minimize input costs or maximise revenues and foreign currency earnings. 

The difficulty arises because the pricing of currency hedging derivatives is opaque. It is difficult enough to know the exact price a spot trade should be at a certain point in time, let alone an FX forward contract for hedging. In many cases this lack of transparency and informational advantage enables bank or brokers to generate excessive profits for specific trades.

What can I do to protect my profits?

Ongoing FX Trade Cost Analysis (TCA) via online hedging tools can highlight how much banks and brokers are really charging for each FX hedging trade. This can in turn enable better decisions about which counterparties to trade with and in many cases facilitate meaningful and productive conversations with those counterparties to enhance the existing relationship whilst also saving money.

Banks and brokers are providing an essential service and we believe it’s fair that they get remunerated for this. However, it’s important to make sure you avoid paying excess costs for FX hedging instead of fair compensation for the services provided.

If you would like to receive some insight into how much you have paid your bank or broker to trade FX, please sign up for a free trial today. You can upload a sample set of trades using our FX trade cost analysis (TCA) tool and see the results for free. We offer ongoing access for a low-cost monthly subscription.