They act on behalf of superannuation fund members when they commit to transactions with the FX desks of investment banks. “There’s an enormous amount of convenience in using custodians to provide the services, but not sufficient monitoring,” Elvish says. Rieck says QIC is not affiliated with any counterparty and does not receive commissions or compensation from FX banks. “QIC operates only as agent for our clients and is never a principal in any transaction,” he says, which provides greater transparency and results for investors. Battye says the common FX model in superannuation is adversarial. The market trades US$4 trillion each day. Its major players are the banks. They determine currency contract prices and “their interest is to make as much money as possible,” he says, and custodians can also exploit the disengagement of principals. Most FX trading increases costs and diminishes returns in four ways, Battye says.

They are: 1. Specialist competency: FX trading is not a core competency of many investment managers. They view it as an administrative process and say its costs are too small to matter. They delegate FX trades to custodians through default instructions and it is common for costs to go unchecked. 2. Bundled service mix: investors may direct all FX trading to custodians or their affiliates, along with typical backoffice tasks. This bundling of additional services may cut visible custody fees but result in poor and costly FX execution. 3. Lack of market structure: Most FX trades are executed away from public exchanges. There are no official trading hours and few reliable trading statistics, Battye says, and no global FX regulator monitors this activity. Given the dominance of a small number of proprietary trading desks, this is problematic. Finally, there is no standard way of reporting FX trades or any obligation to disclose the times at which they are executed. 4. Potential conflict of interest: FX trade executors, such as custodians, can stand on both sides of the transactions. Here, a conflict of interest emerges, because they can trade at unnecessarily high prices.

This can go unnoticed because there is no obligation to reveal the timing of these transactions. Elvish says superannuation funds place more emphasis on investment performance at the expense of the more certain gains made through implementation efficiency. “The betting is skewed to the longshot, and members are unnecessarily wearing the cost,” he says. Behavioural and psychological factors cause this. It is more enjoyable to talk about investments than the practicalities of FX and investors are typically too confident. “Individuals over-rate their ability and skill – most of us are above average!” Elvish says. “We spend a huge amount of time and energy in pursuing alpha, which is a zero-sum game, or a negative-sum game after fees.” Little attention to FX leads to insufficient resources allocated to managing these exposures because “people don’t know what they don’t know”, he says. “The only time that some super fund execs buy foreign exchange is when they go on holiday.”

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