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Forex difficulties encountered by UK investment managers, along with strategies for surmounting these hurdles

In the current economic landscape, the foreign exchange market (FX) serves as a potential source of subtle financial losses or a valuable tactical gain for fund managers. The pressure to control expenses has become increasingly pronounced.

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Challenges in Forex Trading for UK Investment Managers and Strategies to Conquer Them
Challenges in Forex Trading for UK Investment Managers and Strategies to Conquer Them

Forex difficulties encountered by UK investment managers, along with strategies for surmounting these hurdles

In today's fast-paced financial landscape, operational efficiency in foreign exchange (FX) management has become a crucial concern for fund managers. A series of surveys conducted by Censuswide on MillTech's behalf in 2023, 2024, and 2024 reveal several challenges that the asset management industry faces in FX cost transparency, manual processes, and onboarding new liquidity providers.

Challenges

  1. Foreign Exchange Cost Transparency: The complexities of cross-border payments, coupled with multiple intermediaries and institutions, result in opaque FX costs. Undisclosed markups, fees, and FX spreads often exceed wholesale interbank rates, making it difficult for fund managers to understand the true cost of their transactions [2][4].
  2. Manual Processes: The reliance on legacy infrastructure and fragmented systems leads to inefficiencies, slow processing, and complexity in executing FX transactions. Manual reconciliations, compliance checks, and operational workflows increase the risk of errors and delay settlements [2].
  3. Onboarding New Liquidity Providers: Regulatory frameworks and supervisory practices create barriers to integrating new liquidity sources quickly. Complexity in compliance, operational due diligence, and technological integration slows onboarding processes for fresh liquidity providers [1].

Solutions and Industry Trends

  1. Enhanced Cost Transparency: The adoption of payment platforms that provide real-time FX pricing and detailed fee breakdowns allows for clearer cost structures and reduced hidden charges [4]. Industry standards for FX rate disclosure and the use of interoperable platforms help harmonize transparency across corridors [2][4].
  2. Automation and Digital Infrastructure: The use of automated workflows, APIs, and blockchain-based solutions reduces manual processing, shortens settlement times, and improves traceability [2]. Digital operational resilience initiatives push financial institutions toward more robust, automated infrastructures [1].
  3. Streamlined Onboarding of Liquidity Providers: Regulatory alignment, digital onboarding processes, and leveraging liquidity aggregators and platforms that offer a network of pre-vetted providers further shorten onboarding cycles [1].
  4. Risk Mitigation Linked to Transparency and Liquidity: Research highlights the risks of herd behaviors and emphasizes the need for managing systemic risk through diversified liquidity sourcing and robust risk frameworks [3]. Asset managers increasingly adopt comprehensive risk and liquidity management tools that integrate with FX and payment systems to balance cost efficiency with resilience.

Summary Table

| Challenge | Impact | Solutions | |----------------------------------|-----------------------------------------|-----------------------------------------------| | FX Cost Transparency | Hidden fees, unpredictable pricing | Real-time pricing platforms, standardized disclosure[2][4] | | Manual Processes | Inefficiency, errors, delays | Automation, API integration, blockchain[2][1] | | Onboarding New Liquidity Providers | Slow integration, compliance overhead | Regulatory alignment, digital onboarding, liquidity aggregators[1] |

In conclusion, the asset management industry faces multifaceted challenges on FX cost transparency, operational efficiency, and liquidity onboarding due to legacy systems, regulatory complexity, and market fragmentation. The pathway forward relies heavily on digital transformation, regulatory harmonization, and adoption of standardized, transparent platforms to reduce costs, accelerate processing, and enhance liquidity access [1][2][4].

Partnering with FX technology providers can bring the lengthy onboarding process down to only a few weeks through express ISDA agreements. Fund managers that leverage automation, data-driven insights, and strategic liquidity partnerships will be best positioned to navigate market complexities, optimise execution, and safeguard profitability. Currency fluctuations, evolving regulations, and intensifying competition mean FX risk is deeply tied to both profitability and resilience.

  1. To address the challenge of foreign exchange cost transparency, it would be beneficial to adopt payment platforms that provide real-time FX pricing and detailed fee breakdowns, which can lead to clearer cost structures and reduced hidden charges.
  2. In the quest for operational efficiency, fund managers can leverage automation, APIs, and blockchain-based solutions to reduce manual processing, shorten settlement times, and improve traceability.
  3. Simplifying the onboarding process for new liquidity providers can be achieved through regulatory alignment, digital onboarding processes, and utilizing liquidity aggregators and platforms that offer a network of pre-vetted providers.
  4. To mitigate risks and maintain business resilience, asset managers should adopt comprehensive risk and liquidity management tools that integrate with FX and payment systems, striking a balance between cost efficiency and robust risk frameworks.

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