FX technology specialist New Change FX has launched regulated foreign exchange benchmark curves for non-standard or broken dates. The London-based firm said that since the launch of its benchmark rates for standard tenors it has become apparent that buyside clients are very often exposed to currency risk on non-standard tenor dates.
NCXF said it would now be able to offer broken date benchmarks in a universe of pairs.
Incorporated in 2012, New Change FX is a fintech company that specialises in delivering price transparency to the FX markets with live, regulated, independent benchmark data and analytics.
Forex market participants have always struggled to benchmark forwards
Market participants have always struggled to benchmark forwards, in particular on broken dates. This is because the only available data on forwards are the generic, pillar, ‘on the run’ or standard tenors (common standard contract durations for forward trades). There is of course some additional information from IMM dates.
These tenors, however, are broadly for the purpose of market makers clearing their risk with each other. Most dates needed by end users are broken dates that meet the specific need of the customer; to match a liability or hedge a future cashflow.
Subscribe for more stories like this, 8am weekdays - for free!
Forward traders distil a considerable amount of risk factors into the prices that they quote to the market. Two yield curves, cross currency basis, jump dates, special dates, turns, supply & demand as well as personal bias all play a part.
It is now possible to reconstruct the forward curve
To view the forward curve correctly one cannot simply interpolate between all the standard tenors and assume that any given date will be near this line. It is possible, however, to reconstruct the curve in the same way a forward trader looks at the risk of a portfolio, NCFX said.
By undertaking an enormous amount of research and working with forward traders, NCFX has been able to pinpoint special dates with accuracy. Once those dates are known NCFX can deliver an accurate benchmark across the entire curve.
The implication for users of TCA (transaction cost analysis) is clear. By using straight line interpolation to assess transaction costs around turn events, errors can be substantial.
Cost calculation errors can really damage an accurate TCA number
Considering that swaps are trading at spreads of 0.4bps or less, a 2.5bp error in the calculation of cost creates a significant error in the TCA.
Being able to quickly and easily access a regulated benchmark for the FX Forward curve is a significant advantage for traders on both the buy and sell-side of the market. The ability to access data derived from streaming forward prices and benchmarked standard tenor data offers a significant improvement in transparency.
Data is available to NCFX TCA clients as part of the service, to API users and to users requiring a desktop calculator via the web.
NCFX publishes the only live FCA authorised FX mid-rate benchmarks and other consolidated FX reference rates. These price streams can be used to calibrate price formation and distribution processes, to perform benchmarked execution and to perform second generation transaction cost analysis TCA calculations in real time.