The Last Look…

It’s funny how the news cycle works, last week I had the opportunity to remind everyone of my distaste for aspects of last look (that would be all of it), this week, thanks to new data becoming available and a paper from FTSE Russell, I can load into the Fix – happy days!

The FTSE Russell paper is reported here, and it is interesting because, obviously, it is the publisher of the WMR Fix, used by so many investors to benchmark their FX. What I found most insightful about the report was how it highlighted the importance of tracking error and why that was a key factor in money managers using the Fix – I found it interesting and not a little annoying.

I thought the paper made a good point when it highlighted how a benchmark on what is clearly just an admin trade for many, can help investors judge underlying manager performance, but that is only half the issue. How, in this day and age, does someone presumably get away with saying that they can’t strip out the FX element of their trading? My problem with the use of the Fix – and let me stress again it is a reference rate, not a traded rate (even though it is used as such by the vast majority) – is that it simply does not measure the true cost of execution, (more on that in a second). But surely each manager can submit a simple analysis to investors providing their FX hedging rates and how they differ from the benchmark. Not only would this allow a simple analysis of underlying performance, it would also highlight those firms that really care about their fiduciary duty and do their best in the FX execution as well.

It is hard for LSEG because it is providing a service, but one that is not being used in its proper form, because literally tens of billions of dollars are being traded at every month-end, on one rate. We all have stories of building amounts through the voice brokers, but I don’t think anyone got to five yards on a match, on voice or electronic venues (in spot, before all the swaps people pile in).

At the moment, everyone is hiding behind the old saw that the client isn’t asking for change, but actually, I don’t think anyone is asking the true client

I still believe that the best way to deal with what is still a growing issue, thanks to pre-hedging/hedging ahead of the Fix, is for the WMR Fix to more accurately represent the actual execution path used. In other words, rather than providing TCA on the last five minutes of a 20-minute trade, and publishing a rate, used to trade tens of billions that is calculated by trades adding up to significantly less than that, calculate over a longer period. I accept it won’t be perfect, but the sheep that need a rate to avoid tracking error will get it, and the rate they get will more accurately reflect the underlying trade and benefit their investors. By all means use the benchmark to assess underlying performance more accurately, as the LSEG paper suggests, but also take the benefit of the better execution!

And it is better execution, as our latest published analysis shows. Across all currency pairs, there was a better outcome if you could replicate the 20-minute TWAP provided by New Change FX, compared to the five-minute WMR rate. The only outlier in the latest data to me, was how maybe the pre-hedging/hedging ahead of the Fix may have got out of hand in EUR/USD, because the price actually reversed during the WMR window!

In our article, we noted that due to different methodologies, we cannot compare this latest performance to the data we got from the old Siren FX fixes, because they front-loaded to a degree. This is a column, however, not a news article, so I think we can!

We published 54 month-end analyses using Siren and (calculated) WMR fixes, so we had a decent average. What was notable about that analysis before we had to stop, was how the savings were starting to reduce form the earlier days. Obviously I am going to claim that’s because people were reading our analysis and waking up to what was going on, but others will have their own (probably more accurate) reasons.

Let’s start by looking at the good(ish). Compared to the 54-month average AUD, EUR, NZD, CHF and SEK all had lower market impact numbers this month. In some cases it was significant, in others, less so. Looking at just the 2024/25 average, however (22 months in total), suddenly the EUR and CHF both had greater impact in dollars-per-million terms than previously. Again, I would stress the methodologies are slightly different, but also point out that the Siren methodology probably enhanced the potential savings compared to a straight 20-minute TWAP.

On the flip side, the second biggest currency pair in the market, USD/JPY had an average market impact cost of a cheeky $234 per million more than the 54-month average and just the $342.50 more than the 2024/25 average. Likewise, Cable was slightly higher than the 54-month average, but about $186 per million more than 2024/25. In keeping with the madness that is the Scandis, USD/NOK and USD/SEK had opposite comparisons, the former costing hugely more than the average, the latter significantly less!

My point in comparing these data is not to show that the numbers have gone up or down, comparison is tricky, but more to highlight how the fundamental issue still exists – investors are missing out on millions of dollars of potential savings from better FX execution every month.

There are those that hope, that like me, the whole pre-hedging/hedging ahead of the Fix issue will just go away – they might be lucky on one count, but not on the other. The data we have published suggests the issue is not going away, and as such it remains a ticking time bomb under the FX industry.

At the moment, everyone is hiding behind the old saw that the client isn’t asking for change, but actually, I don’t think anyone is asking the true client. If you went to millions of investors in pension funds and index trackers and offered them even $100 per month, they would take it. Instead, we ask the trustees, who clearly have no clue/interest in this issue, but hold the reins. I speak to execution desks on the buy side who are intensely frustrated by their firms’ use of the Fix, but the people who would make that decision – the trustees – have their heads in the sand.

I actually think that FTSE Russell would be doing the entire industry a service if it set out to more accurately reflect the actual execution path for the majority of the business behind its benchmark rate by extending the window. Yes, banks would, and to stress here they are doing nothing wrong per se, make slightly less money out of the Fix, but frankly, some of them don’t know what to do with that money anyway. It would fill in a potential pothole ahead of their business.

It would also benefit the end investors – the people we should be really caring about here – and into the bargain save the trustees from themselves. More importantly for everyone involved, perhaps – it would also stop me banging on about the issue!

colin@thefullfx.com