J.P. Morgan brings greater transparency to the overlay space

In a challenging environment, demand for J.P. Morgan’s FX overlay market services has risen significantly as market participants seek to navigate the hedging and execution complexities of the FX market

The storm of geopolitical, economic and regulatory events that has rocked the FX market over the past few years has made managing currency risk a difficult proposition. Wars in Ukraine and the Middle East, heightened volatility stemming from diverging interest rate regimes, and the impact from the introduction of the standardised approach to counterparty credit risk have prompted many institutional managers to re-evaluate their hedging strategies and overall currency risk. Many have turned to FX services providers such as J.P. Morgan to manage that risk.

As one of the world’s largest tier one FX banks, J.P. Morgan has a range of FX execution methodologies and the data‑sourcing infrastructure to handle complex portfolios.

“In the current environment, market participants are particularly keen to have firms that are FX experts facilitate their currency risk management functions,” says Sashin Chander, J.P. Morgan’s global head of currency overlay solutions.

“J.P. Morgan is the logical partner. We have one of the most complete suites of FX execution capabilities on the Street. Whether pricing, cost-effectiveness, credit risk or any other objective, we have an execution capability.”

“Beyond our suite of execution capabilities, our data insight is also impactful,” Chander adds. “As one of the biggest FX banks¹, we generate a lot of data, but what makes it worthwhile for our clients is how we use that data to fine-tune the outcome of their workflows: by optimising the process of calculating FX risk and executing their hedges.”

J.P. Morgan’s FX Services data strategy provides clients with greater market transparency, enabling a view of the cost of liquidity and the cost of capital where liquidity in the competition execution model is selected, earning the bank recognition during the awards process.

While J.P. Morgan provides a rules-based solution to managing its clients’ FX overlay strategies, the bank also reports on the performance of clients’ hedging portfolios using the data it has gathered. Analysis of the factors contributing to the FX hedge’s under- or over-performance – such as cost of carry, bid/offer spread and time delay – can then be used to recalibrate clients’ hedging strategies to improve economic outcomes.

This includes the use of FX heat maps that allow clients to visualise liquidity patterns, FX spreads and trading volumes – which helps clients identify opportunities to improve the execution quality of their FX orders – using the execution methodology that best fits their objective. Furthermore, the bank can analyse clients’ specific currency overlay data and past activities with them, delivering tailored insights and empowering clients to optimise their hedging strategies and make informed decisions to improve outcomes.

Clients are also given access to a suite of customisable trade reports supported by downstream integration with industry‑wide systems, or other client-specific platforms, enabling a detailed view of the services J.P. Morgan is providing them. With this oversight, clients can measure the execution quality of processed trades, which can help with efficient cashflow management.

On the execution side, J.P. Morgan addresses its clients’ needs through a rules-based approach that enables them to define their own bespoke execution strategies across a full suite of methodologies. This includes @marketexecution, where all trades are sent to J.P. Morgan’s internal market-making desks for immediate pricing. Alternatively, client orders can be executed referencing a supported public benchmark or, if preferred, through the bank’s suite of algorithmic execution strategies.

The last alternative is a hybrid model that combines the operational ease of principal trading with the competitive pricing benefits that agency execution can provide. Dubbed Liquidity in Competition (LiC), this hybrid solution provides pricing across a pool of preferred liquidity providers with the benefit of facing J.P. Morgan as the only counterparty. As a result, participants avoid the operational work of maintaining pre- and post-trade workflows with multiple banks.

Another benefit is that the competitive nature of pricing through LiC can assist in satisfying clients’ best execution obligations and, with trades channelled through J.P. Morgan, information leakage to the market is minimised, which can result in a better outcome. When clients seek liquidity under their own ticker/fund name, details are revealed as to which fund is looking for a price in which currency and size, and so on.

“Since dealers compete for trades, client costs are reduced, but they still benefit from J.P. Morgan’s credit standing to secure the best price available on their panel of predefined banks,” says Chander. “Our dedicated FX Services desk sits separately from the market-making business and is not judged on profit and loss but rather on the quality of execution and minimising market impact.”

“With central banks adjusting interest rates at different paces, the biggest likely cost for clients is the interest rate differential,” he notes. “While they cannot control the cost of carry, LiC allows them to control the cost and quality of execution. Clients benefit from the breadth of access to liquidity, lower costs and market impact for asset managers and owners that routinely roll large, passive hedges.”

Adding granularity to hedging models

As the portfolio hedging market becomes more mature, Chander expects clients will want to add greater granularity and optionality into their overlay strategies, while maintaining some form of tactical control to direct the outcome of their hedges.

“Asset owners, such as Australian superannuation funds, have complex currency hedging needs, and many of the enhancements to our portfolio hedging currency overlay offering have been built with these in mind,” says Megan Jones, head of Asia-Pacific FX Services sales at J.P. Morgan. “One enhancement, as institutional investors continue to internalise investment management functions, is the ability to automatically adjust the accompanying hedge in line with the trading of the underlying security for asset classes such as fixed income. This will mitigate risk arising from a delay between the trading of the asset and adjusting the accompanying hedge, allowing the portfolio manager to focus on managing the underlying asset class.”

“We are investing heavily in our portfolio hedging capabilities to create a lot of flexibility in our platform,” says Chander. “I want to create a platform that is so flexible and so intuitive that, to a portfolio manager, it feels like we are sitting on the other side of their desk. And, with that flexibility, we’re going to see more proliferation in the delegation of portfolio currency risk management.”

“The key to achieving any level of granularity in portfolio optimisation is large quantities of correctly targeted data,” he points out – without which, actionable insights cannot be delivered. “But there has to be the right balance in the amount of data we deliver. It should not be excessively complex, but just enough that clients can hold us to account while being straightforward enough that they can fine-tune their strategies every so often to focus on their core businesses.”

J.P. Morgan was voted Best FX overlay manager, Best liquidity provider for FX spot, Best liquidity provider for FX options, Best liquidity provider for financial institutions and Best single-dealer platform at the FX Markets e-FX Awards 2024.

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