Best FX overlay manager: State Street

In the most challenging market environment in many years, demand for State Street’s currency management offering spiked in 2022 as market participants sought assistance in minimising their FX risk and optimising their hedging activities

The geopolitical, economic and regulatory events that unfolded in 2022 altered the dynamics of the FX market and exposed challenges in currency risk management. Faced with correlated risk events, including fast-rising interest rates and heightened FX volatility, Russia’s invasion of Ukraine and the introduction of the standardised approach to counterparty credit risk (SA-CCR) earlier in the year, market participants began re-evaluating their hedging strategies. Some institutional managers that had previously handled much of their hedging activity internally felt compelled to outsource some of these activities to specialised currency managers, such as State Street Global Markets (SSGM). 

Indeed, SSGM saw a significant rise in the number of new accounts opened by market participants throughout 2022 and, by the first quarter of 2023, was managing nearly 6,000 hedging and agency execution accounts. 

“Under the stress of the new market dynamics, some managers decided to re-evaluate their decisions to manage their FX exposures internally, and chose to outsource the part of their activity they viewed as non-core,” says Steve Fenty, global head of currency management at SSGM. “Over the past year, we added new accounts at one of the fastest rates in any 12-month period in our 30-year history.

“During this time, through effective programme management, SSGM insulated clients from operational risk despite a significant rise in volatility and one-off events. For example, in one of the most challenging market environments, we helped managers unwind their ruble positions before and during Russia’s invasion of Ukraine.

“Similarly, when SA-CCR changed the way banks extend credit for FX swaps and forwards, we supported clients in managing their capital footprints by expanding broker panels, partnering around collateral solutions, managing counterparty exposure and restructuring trading programmes.”  
 

Flexibility at scale

SSGM provides outsourced agency FX hedging and execution to a diverse set of clients, including asset owners, investment managers and alternatives managers. This population includes large asset managers that distribute hundreds of funds worldwide. To offer the scale required by these managers, SSGM has integrated proprietary technology and risk management tools throughout the lifecycle – from onboarding through post-trade. However, scale is only one piece of the puzzle.  

SSGM emphasises the importance of partnership in supporting customers’ full range of strategies, as well as new product initiatives. In what it terms ‘flexibility at scale’, SSGM leverages automation and its experts to deliver bespoke options that meet individual client needs without sacrificing scalability. SSGM’s technology can, for example, seamlessly integrate dozens of custodians and counterparties, allowing their clients to independently choose which partners they work with. This is particularly beneficial to managers seeking a consistent global operating model. 

“Our clients require scale, but also require customisation and flexibility to achieve their investment and product distribution goals,” explains Fenty. 

In addition to managing its clients’ existing mandates, SSGM also partners with them to improve their FX processes, adapt to change – such as the move to T+1 settlement – and develop new products. In many cases, custom analytics are made available to help customers evaluate product feasibility and understand the impacts of implementation decisions. 

Fenty concludes: “Our clients trust us to manage an important part of their investment process. We value the opportunity to partner during the product development phase and not only during implementation.” 

 

State Street was named Best FX overlay manager at the 2023 FX Markets e‑FX Awards.

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