Academic Study Highlights Small Business FX Hedging Challenges
(Europe - 29 July 2019) A recent University of Geneva academic paper found that price discrimination was common for ‘unsophisticated’ smaller clients based on analysis of 500,000 EUR/USD trades using data from trade depositories made available by regulators in FY 2016/17.
The findings suggest that foreign exchange (FX) dealers offering derivative contracts such as Forward FX or FX Options charge smaller, unsophisticated clients higher commissions. The Swiss study found consistent price discrimination in EUR/USD contracts. Given varying FX exposures and different tenors of contracts, privately negotiated derivatives are usually the norm for what is commonly just a biannual FX risk mitigation requirement.
In Australia, the Australian Consumer and Competition Commission (ACCC) is examining price competition amongst suppliers of FX conversion services and considering how easily potential entrants to the market can compete. In terms of potential FX price discrimination in Asia, Hong Kong, Singapore and Tokyo are the three most prominent locations where FX derivatives are exchange traded. Singapore, a leading hub for regional treasury centres, is where the majority of turnover is recorded. In 2018 the Monetary Authority of Singapore (MAS) reported that USD/JPY, USD/EUR and USD/SGD were the most common trades in the over-the-counter (OTC) derivative markets. Banks likely offer FX products involving the currency pairs to their non-financial clients.
Given the confidential nature of such bilateral contracts, comparable data is difficult to locate for FX pairs however a Sydney-based treasury risk consultancy believes the situation would not be too different if a similar study were conducted here. The issue is compounded by the fact many treasurers come from an accounting background and may not always have FX risk management expertise. Many treasurers in the middle market rely on banks as sole counterparties whereas it is commonly believed that it is preferable better to have a selection of panel bank counterparties including non-bank FX providers that are competitive on pricing.
Several newer technology solutions have emerged with the ability to aggregate prices from several banks and brokers in a user-friendly interface. Uptake for platforms that allow clients to see multiple quotes from different dealers for any FX trade have has been limited, however.
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