IA Calls for Reform on FX Subcustodian Timestamping

As frequent participants in FX markets, the Investment Association’s members are keen to ensure that FX markets function well and continue to serve the interests of investors. In order to do this, and to meet their obligations to their clients, they require sufficient data to allow them to monitor the results and effectiveness of their FX trades. 

One such category of data is timestamps. When trading, an asset manager will look to receive from their counter-party, at the very least, a timestamp for when the order was received, and when it was executed. This data is vital in helping investors meet their obligation with regard to best execution and other regulatory and supervisory requirements, as well as to manage their own FX risk and hedging activities. 

Asset managers will often delegate their FX trading to a custodian who then trades on their behalf. This may be done for a variety of reasons, including to take advantage of a custodian’s expertise in this area. In such instances, a custodian trading on behalf of asset managers should provide their clients with the relevant timestamps for a given trade. 

In some instances, a client will delegate a trade to a custodian that requires a trade to occur in an emerging market jurisdiction where that custodian does not have a local desk. In this instance, a custodian will delegate the trade to a local subcustodian, who performs the trade on their (and therefore the custodian’s client’s) behalf. 

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. 

This lack of precision makes accurate analysis of the quality of a given FX trade very difficult, which in turn has a negative impact on ability of asset managers to manage risk for themselves and their clients. Given the speed at which FX markets move, it has been noted by members that any timestamp that is more than a few seconds wide makes effective transaction cost analysis largely impossible.  

In early 2020 the IA put out a Guide to Best Practice for Sub-Custodian Timestamping in FX, setting out investor expectations and recommendations for improving timestamping. 

However, since then members have noted that progress has in some cases been slow, and that while many custodians have been able to offer the hoped-for level of timestamping, in others the provision of timestamps remains inadequate. This is despite the FX Global Code of Conduct stating 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 IA is today publishing a briefing paper in which it once again sets out the need for reform, and urging further progress. The IA looks forward to engaging with key stakeholders to ensure improvements that benefit the market as a whole. 

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