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Implementation Shortfall API Regulatory reporting obligations concentrate trade cost reporting on measuring the effective spread. This is defined as the difference in price between the execution rate achieved, and the relevant mid-rate pertaining when the order was externalized to the market (i.e. Order Submission Time). Recording the order submission time captures the market impact of an order, but it does not capture the cost of delay that an order accrues as it passes through the trading process. Implementation shortfall captures the friction cost of an order from the moment it is raised to completion. NCFX proposes an API that allows clients the opportunity to identify transaction costs over time. We do this by calling NCFX Benchmark mid-rates at 4 distinct moments in the trading lifecycle as follows: Origination Time: This is the time that a new FX exposure occurs in the portfolio. Origination time should identify the inception moment when changes in the underlying exchange rate will impact portfolio valuation. We could say that Origination Time is the time when an order first appears in an Order Management System. Desk Time: This is the time that an order is first registered by an Execution Management System or trading book. Once an order is recorded in an EMS, or a trader is made aware of the instruction, a trading strategy can be developed. Submission Time: This is the time that an order is submitted externally to the Market. From the moment an order is submitted it will start to create market impact. Fill Time: This is the execution time recorded and returned by the executing counterparty. This timestamp is always a post-trade time stamp.

Tracking the prevailing NCFX Benchmark at these four distinct moments in time allow us to identify where costs are arising in the trade process:

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Origination Cost: The cost arising from market movement between originating an FX exposure and recognizing the order in an execution management system and/or on the trading desk. Desk Cost: This measures the cost arising from market movement between the time an order is recorded on the trading desk and the time it is submitted to Market. Submission Cost: This measures the cost arising from changes in the mid-rates between Submission time and the NCFX mid-rate Benchmark at the Execution Fill time Skew: This measures the cost arising from the difference between the NCFX mid-rate Benchmark at the Execution Fill Time and the achieved Execution Fill Rate. Implementation Shortfall is the product of the 4 cost components above added together and represents the total cost of executing an order.

The Implementation Shortfall API is available for Spot FX only allowing for a complete breakdown of total costs incurred through the execution process. The API converts all costs to USD at the relevant USD exchange rate at each time stamp to enable a common comparison of costs between pairs that are quoted in different terms. A version for outrights is planned for release in the near future. For more details about the NCFX Implementation Shortfall API please contact your NCFX representative.

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Implementation Shortfall