Access routes 

Currency markets can be traded through providers acting as one or more of: principal, agent, or on a peer-to-peer basis.

The perceived default option for some firms might be using their corporate bank, an investment bank or a single access point such as a broker or custodian, but this could in some cases prove to be expensive. “If clients are beholden to one counterparty, they may not get best execution. The issue is transparency,” argues Huttman. 

Though some FX providers acting as principal claim they can match various FX benchmarks, and demonstrate “best execution”, there is potential for perceived or real conflicts of interest. Where it is possible to beat the benchmark, will any or all savings be passed onto the client?

MillTechFX operates on an agency basis, accessing more than ten banks that make markets in foreign exchange and give clients full visibility. “Regardless of their size, all clients have sight of the same competing streams of FX quotes from more than ten banks, and this visibility is the same as any other Millennium client,” says Huttman.

Fee models

MillTechFX aims to save clients 50% of execution costs, after its own fees. The business model is to charge fixed and transparent fees, though clients have some choice in how the fee is structured and allocated. “They may opt for their fee to be transparently contained in the rate, or be separately charged via invoice,” says Huttman.

Incidentally, some of sister firm MGI’s investment products have performance fees. MillTechFX would not however charge a performance fee for execution. “We are not a price provider, and we have no skin in the game. Charging performance fees would be odd and culturally wrong as we are not providing an investment management service. We offer an operational managed solution with access to pricing,” explains Huttman. 

In the “sharing economy” that has spawned many FinTechs, peer-to-peer FX platforms can offer potential for disintermediation that could avoid part or all of bid/offer spreads where it is possible to cross trades at or near the mid-price. MillTechFX might contemplate adding such platforms to its list of liquidity providers, though internalization and netting between and amongst clients are not part of the business model. “From a governance and cultural standpoint, we would not net trades between clients. We are an access point not a bank or a venue. Clients face the underlying banks,” points out Huttman. 

Transparent transaction cost analysis

“Best execution” is independently calculated to gauge potential clients’ current cost of execution and whether it can be improved by MillTechFX. 

It is possible to benchmark execution to a benchmark such as the WMR 4pm London close, or Bloomberg’s BFIX methodology, and these sorts of mandates can be done at competitive fee schedules. 

“MillTechFX usually defines transaction costs as prices paid versus an independent mid-market at that point in time. Any market impact is monitored by the execution team,” says Huttman.

Deep pools of liquidity can help to avoid or minimize market impact. Whereas some peer-to-peer platforms are at present quite small by corporate standards (and sometimes must end up acquiring inventory to bridge imbalances), MillTechFX is confident in offering scalable market access for substantial tickets: “We can live stream up to $100 million in a single notional ticket with larger notionals routed to the execution desk, or executed at a benchmark rate,” says Huttman.

The transaction cost analysis (TCA) is defined as “embedded” because it is a core part of the offering and is not charged for separately. “It is also independently provided, currently by BestX. The costs of this are covered by MillTechFX,” says Huttman. BestX was acquired by State Street in August 2018.

Clients can obtain the trade data if they want to form their own view or get a second opinion from other TCA providers.

Hedging ratios and rebalances

MillTechFX can offer guidance on the technicalities and practicalities of risk management and hedging, but ultimately clients determine their optimal hedge ratios, for instance for master funds and share classes. A mechanical rebalance naturally adjusts target hedge ratios for performance changes, subscriptions and redemptions. Beyond that, clients can take a discretionary view on how much exposure to potential volatility they can tolerate. They have been heeding the turbulent market climate of 2022. “While there will always be some that don’t hedge their FX risk at all, those that haven’t are now considering doing so given recent market volatility and negative currency impacts. Those that already had formal hedging programmes in place are now increasing their hedge ratios to protect their bottom lines,” observes Huttman.

Trajectories of interest rates, which influence hedging costs and benefits, can also be factored into these decisions: “The high-level hedging decision is partly informed by interest rate differences and the shape of the forward curve,” points out Huttman.

There are also choices to be made about maturities of FX contracts and how often they are rolled to the next maturity. “We have seen a shift towards shorter tenors of FX forwards used for hedging. Instead of locking in rates for 12 months or more, firms are increasingly using more shorter dated forwards with tenors below six months which are then rolled at maturity to maintain the hedge. This helps to provide them with more flexibility should they need to adjust their exposure,” explains Huttman. 

Further decisions can be taken about the types of instruments used to implement the hedges. Currently, plain vanilla FX forwards, swaps or rolls are used rather than options. The goal is to minimize costs of executions. “During calmer times pre-Covid, firms moved towards more exotic products. Now they appear to be reverting towards the more straightforward linear products, such as forwards, which are more liquid and easier to unwind should the market move against them,” says Huttman, who spent part of his career trading FX options for HSBC in Hong Kong.

Most of the client base are trading G10 currencies, though MillTechFX can trade emerging market FX in the G20 and potentially beyond.

“Zero margin” hedging 

Option strategies can be one way to reduce margin requirements for some sorts of FX hedging strategies, but there is also potential to hedge with zero margin per se. 

Some clients find that having limited cash or acceptable collateral effectively ties their hands and forces them to hedge less than they might otherwise wish to, but there can be solutions here to increase their freedom and flexibility. In December 2021, MillTechFX partnered with Investec Bank plc to offer a zero margin hedging solution, which involves a credit charge rather than outlays of initial and variation margin. The credit charge could work out more efficient than margin requirements for some firms. 

This uncollateralized solution is especially attractive to private credit and private equity managers with illiquid underlying assets as this enables them to avoid having to call capital from their LPs to fund margin calls. The zero margin solution offers the same transparent execution, counterparty access and transaction cost analysis as the other offerings. MillTechFX shareholders include a private equity firm, VCM Global Asset Management as well as private equity veteran, Sir Ronald Cohen. 

Expedited onboarding routes

The service does not require an investment management agreement, and there are at least three onboarding models.

The most common one is to avail of MillTechFX’s full suite of counterparty relationships: “We have agency ISDAs with all of our banks, and clients can be onboarded under these ISDAs,” says Huttman.

The zero margin solution can be swifter to onboard. “Clients have access to our full panel of banks via the credit-providing bank and a prime broker that sits behind them. This is faster because there is only one ISDA,” says Huttman. 

A third option for some clients who only need FX spot and payments is a matched principal offering. “Clients are issued with a virtual IBAN (International Bank Account Number) via our transaction bank, authorizing payments via MillTechFX. The client faces MillTechFX, with MillTechFX facing its prime broker and there is no ISDA needed,” explains Huttman. 

The onboarding time can be as little as a few weeks, which might be much faster than clients attempting to go it alone: “We have a process that does the heavy lifting to enhance information collection for KYC and AML. It is an end-to-end solution with quick and easy on-boarding. Rather than spending months (or even years) setting up multiple FX facilities with different counterparties, clients can sign up to a multi-bank marketplace and transact within weeks with up to 15 Tier 1 counterparty banks,” explains Huttman.

FinTech and FX as a Service (FXaaS)

MillTech FX is viewed as a “FinTech” because it uses proprietary technology to offer a financial solution. “We are a true FinTech, not a TechFin. The entire offering is technology driven and enabled. Over half of our 73 staff are in technology,” says Huttman.

If Software as a Service (SaaS) business models are well understood, FX as a Service (FXaaS) is becoming increasingly sought after and Huttman enumerates the benefits: “We can offer end to end automation of workflow, cashflows and operational processes, with best execution at fixed costs via the multi-bank market and third-party evidence of best execution through TCA. This lightens the operational burden. Our model is unique in the sense that rather than just providing a multi-bank FX marketplace, at MillTechFX we offer an entire FX-as-a-Service (FXaaS) solution that automates the FX workflow and ensures transparent best execution”.

“FXaaS represents the evolution of currency management through automation, integration, and validation. This allows our clients to benefit not only from MillTechFX’s multi-bank market access, but also our pricing power, margin free hedging and transaction cost analysis. This delivers a tech-enabled integrated solution that delivers transparency, cost reduction and operational burden reduction,” says Huttman.

The technology offering is constantly advancing, and readers should watch this space for upcoming improvements: “Soon API links will be set up for internal Treasury management,” says Huttman.