Michel Klein, Director of FX Product at RBC Investor & Treasury Services: Increased market volatility, stemming from central bank policy changes to address inflationary pressures, is affecting the performance of FX execution. Higher volatility throughout the trading day means there is a higher risk of wider spreads in multiple execution points throughout the day.
In this regard, the need for a robust and wide range of digital technology solutions should be a strong axis of development for funds service providers. They can offer highly flexible and various solutions to provide clients access to data on a self-serve basis. Some clients are very sophisticated, and they simply want access to raw data on an API. Others like a dynamic dashboard, and the ability to log in and have it presented or bundled with quality tools and ways to visualize the data. Future solutions must cater for all these different user groups.

These solutions can also include access to performance attribution tools to depict the true costs of FX execution and, once quantified, these costs can then be stripped out to give a more reliable picture of the true investment performance of funds. Asset owners will be able to compare the funds more accurately on the basis of true performance.

In addition there is an increasing demand for a more seamless and arguably single FX operating and execution model. Instead of asset owners having multiple segregated accounts at different custodians, they now want a single and seamless FX operating model.

Digitalisation of FX workflows and data models has been ongoing for some time now, but it has recently ramped up considerably, and this is something that asset managers are looking to capitalize on. Just as digitalization swept through the retail banking world, asset managers are increasingly demanding tailored and accessible FX services - delivered to them through their smart devices and ideally on a near real time basis.
Asset managers are also seeing the emergence of disruptive technologies such as Blockchain which may in time lead to facilitate trade settlement more widely in FX markets - a development that could result in operational efficiencies and better transparency.

Meliosa O’Caoimh, Country Head, Ireland, Northern Trust: The challenging global economic environment we have seen in 2022 has focused asset managers’ attention on the need to address FX currency risk in their international portfolios, combined with the desire to increase fund distribution and ease of access to attract new investor markets who may now consider currency risk as a further consideration.
To differentiate, some managers are expanding their range of share classes and looking at more dynamic and complex currency hedging programmes. This comes with increased operational risk and scalability challenges and is leading more asset managers to evaluate their resource prioritisation and consider whether outsourcing to a specialised service provider can support these aims.

Some specialist FX currency management providers in the funds service space have enhanced their product set and digitized the client experience with data visualisation tools to help them monitor and identify various attributes in the hedging model that can impact performance on a near real time basis. This can be a powerful tool for data driven decision making and add real value in discussions with underlying investors in explaining performance divergence.

A skilled FX manager can also support asset managers with nuanced hedging models with the utilisation of new technologies, freeing up time for the asset manager to focus resources on alpha generation. These hedging models may span multiple approaches - from vanilla share class hedging to look-through hedging at the portfolio level to index benchmark replication and more dynamic models utilising tools such as variable hedge ratios that adjust to market signals and staggered hedging models to reduce PnL volatility.