FX Timestamping Progress “Slow”, “Inadequate”: IA
Posted by Colin Lambert. Last updated: April 11, 2022
The UK’s Investment Association (IA) has published a briefing paper reinforcing its call from 2020 for reform in how FX trades are timestamped by custodians, noting that progress has in some cases been “slow” and that some custodians’ provision of timestamps remains “inadequate”.
It cites the FX Global Code’s statement that “information should be made available to clients upon request, to provide sufficient transparency regarding their orders and transactions to facilitate informed decisions regarding their market interactions.”
The major source of the problem highlighted by the IA seems to be in the sub-custodian area, typically where trades delegated to custodians are passed on to a third party because the custodian does not have a local desk or support that currency pair. “In recent years, our members have raised concerns that in many instances where a trade has been delegated by their custodian to a sub-custodian, they are not receiving back timestamps at anywhere near the level of accuracy required,” says Hugo Gordon, senior policy advisor at the IA, in a blog post.
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Given the advances made in this area over the past few years, the Investment Association’s comments on FX timestamping are a little concerning. In mitigation of the claims it should be noted that the lack of progress is likely to be in emerging markets where technological resources may not be as strong as they are in developed centres, but that should not be reason enough to ignore this report.
For a start, in this day and age with FX liquidity, one has to question why the custodian needs a “local desk” the lack of which was cited by the IA as a factor. FX is a global market and, aside from restricted markets, a price is available for at least 10 hours a day, often more. Why can the main custodian not merely execute the trade (electronically) with a liquidity provider in the required pair? The automated nature of the trade would provide the necessary timestamp.
If the trade is in a restricted pair, then perhaps the IA’s members need to be a little more lenient. Many local markets are phone driven, therefore executed the trade, confirming the details, making the appropriate note on the dealing ticket (or entry into a system) will take more than the “few seconds” after which the IA says TCA becomes impossible.
Where electronic capabilities are available, however, there is no excuse for poor timestamping, so hopefully the IA is sharing with its custodians the names of those firms who lack adherence.
There has to be trust in the FX trading process involving custodians – and it is not easily gained following the revelations of 10 years ago. That makes it even more important that the all custodians, where at primary or sub-level, adhere to the FX Global Code and timestamp accurately.
The alternative, as we have discovered to the industry’s cost, is a lengthy and expensive process that really helps no-one.
The IA explains that in some cases its members may receive timestamps that are accurate only up to the nearest minutes, or even only the day on which a trade takes place. It has to be said that the IA’s members’ demands are not unreasonable – in an era in which trading speed is measured most commonly in milliseconds, Gordon says in the blog post that its members believe that “any timestamp that is more than a few seconds wide makes effective transaction cost analysis largely impossible”.
It was also noted by IA members that some custodians offered more accurate timestamps than others, citing this as evidence that the data would be available at the required speed. In the original 2020 paper, the IA said its recommendations were published after extensive consultation with a number of custodians who agreed that they provided an eminently achievable framework for improved provision of sub-custodian timestamps.
“Despite this, members have been disappointed in what they see as a lack of progress in improving the provision of sub-custodian timestamping,” the IA states in the updated paper. The IA recognises that the COVID-19 pandemic greatly affected the plans of the industry, and that in such circumstances it is natural that there would have been some delay to the implementation of this project.
“Nonetheless, the IA notes that while many custodians are able to offer the hoped-for level of timestamping, in some cases the provision of timestamps remains inadequate,” it adds. “The IA and its members therefore call on custodians to continue to implement the recommendations of the Best Practice guide, and to, where necessary, apply pressure on their sub-custodian partners in order to achieve all possible levels of reform.”