Funds Europe speaks to RBC Investor and Treasury Services’ Pat Sanderson, Head of Global Client Coverage for the UK, and Roger Exall, Head, European FX Sales and TMS Business Development, about the importance of FX hedging and how the market for FX hedging solutions is evolving.
FX hedging can have a major impact on the performance of an asset management product. When applying share-class hedging, an asset manager aims to mitigate the effect of exchange rate movements between a fund’s base currency and the currency of the share class – ensuring that performance of the share class mirrors that in the fund’s base currency as closely as possible.
For portfolio FX hedging, the asset manager aims to manage risk – and in some cases to capture alpha – resulting from movements in the currencies in which a fund’s assets are denominated, or from strategic currency positions established by portfolio managers as part of their investment policy.
Previously, many asset management companies bought an FX share-class hedging product as part of a bundled securities services package. However, Roger Exall says that it is becoming increasingly common to purchase this as a specialist, standalone solution, with the asset manager running a dedicated RFP process to select the best provider in market to meet their requirements.
For Pat Sanderson, advances in technology and data management have made it easier for asset managers to purchase their specialised FX hedging requirements on a modular, or standalone, basis. “Technology development is making oversight and data access easier to manage,” he says. “Buying a bundled product enabled the customer, among other benefits, to centralise data across multiple functions (e.g. custody and fund accounting, FX hedging, securities lending …) with a single service provider and to source associated reporting and analytics via a single point of access.
“Now, clients can interrogate data more effectively across multiple providers, linking easily to third-party data service providers. This has generated a more open mindset about how they access data and procure services across their organisations. The challenge is how we take the FX data and deliver real value on the client side,” explains Sanderson.
“The strength is to blend the expertise of subject matter experts in the FX team and to overlay this with the experience and creativity of our data engineers to build applications that solve problems for the client.”
A requirement, he notes, is to deliver solutions without being encumbered by the bureaucracy of change management that prevails in many organisations. In doing so, RBC I&TS recognised that it could no longer rely on traditional change channels. This has prompted a fundamental review of its data architecture and strategy for managing and communicating data. “As we have adapted, we view the delivery and management of data as a product in itself, rather than simply as a support function for other products and services.”
At RBC I&TS, the FX hedging team has invested heavily in delivering post-trade data for its clients, providing a view across the full range of oversight requirements and analytics on the performance impact. This has included a focus on data timeliness and accuracy, improving the client’s digital experience and continuing to extend automation levels across the FX transaction lifecycle.
Looking ahead, Exall says that the immediate focus will be on continuing to invest and expand its range of data and analytics solutions to provide more value to clients: “A collective positive and open engagement is key and we have seen the willingness of clients to work with RBC I&TS as a solutions provider across an expanding range of areas – delivering data and analytics that support their needs from the investment decision through to their post-trade requirements.” Exall also highlights opportunities to assist asset management clients with collateral optimisation, ensuring collateral is mobilised and allocated efficiently to where it is required.
To be relevant, Sanderson believes that service providers need to address the key macro challenges that are confronting their asset management clients – risk management, revenue generation, operational efficiency and managing regulatory change. “Typically, if a solution does not hit one of these key challenges, asset managers may be reluctant to engage,” he says. “With this in mind, the portfolio of services that we offer at RBC I&TS is targeted directly at these important macro drivers.”
In doing so, timeliness of delivery is essential. “As a specialist, standalone FX service, if you cannot deliver solutions quickly then you will fall behind the market,” he concludes. “But for a post-trade industry that is not always known for executing quickly, the development of our FX hedging service illustrates how we can engage with clients to deliver fast, effective solutions.”
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