Smart SMEs should scrutinise the cost of their currency trades, after banks were fined $4.2 billion for rigging foreign exchange benchmarks and failing to control business practices. Farah Khalique talks peer-to-peer FX and the options available when it comes to currency transactions.
Six banks, including British banks HSBC and RBS, were fined by regulators in November for colluding to manipulate foreign exchange benchmarks that are widely used by companies for their currency trades.
The Financial Conduct Authority is currently investigating other nefarious practices in foreign exchange as part of its ongoing Fair and Effective Markets Review.
Peer-to-peer FX is a popular, non-bank solution for SMEs that want to see a clear breakdown of the cost of their currency transactions, and secure a fair exchange rate. P2P FX works by matching buyers and sellers of currencies on a shared platform, meaning SMEs often trade with one another. Providers such as Midpoint, TransferWise and Kantox publish mid-market exchange rates and transparent fees.
Larger companies that still require the services of a bank can take a different route. Corporate treasurers can explore Transaction Cost Analysis solutions, to analyse previous currency trades and see if they overpaid. They can then re-negotiate with their bank to secure lower prices for future currency trades, or find a new bank that offers more competitive pricing. TCA providers have sprung up in recent years, such as ITG and FXTransparency, to cater for large corporates and asset managers that want to query the cost of their trades.
For those that want a more real-time solution, independent live benchmarks are a newer option. Existing FX benchmarks, such as the 4pm London fix, have come under fire since the allegations of rate-rigging first emerged.
FX consultancy business, New Change FX, calculates a live benchmark mid-rate for 42 currency pairs so that people can see, trade by trade, what they are paying. ITG recently launched its FX Trading Cost Index app to allow users to quickly check whether their estimated trading costs are reasonable before trading.
Farah Khalique is a freelance business and financial journalist, with a keen interest in writing about non-bank financing solutions that can help SMEs grow their business. She has written extensively about banking scandals and has made TV appearances on Sky News and The Wall Street Journal Live to comment on topical issues including money laundering and bankers’ bonuses. Follow her on Twitter @FarahKhalique