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Shrouding and the FX trades of global custody bank

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  • Osler, Carol
  • Savaser, Tanseli

Abstract

This paper identifies a new approach to shrouding, the practice of hiding supra-competitive product prices, and sheds light on an extraordinarily opaque and hitherto unexplored segment of the world's largest OTC market. The product is liquidity for FX transactions between global custody banks and their client funds, transactions in which the clients are not actively involved and cannot identify execution costs ex post. We develop a stylized model of shrouding that predicts FX dealers will shift among three pricing strategies over time within individual client relationships. We conduct an extensive econometric analysis of the complete FX trading record of a mid-sized global custody bank over one calendar year. The data provide support for all ten of the shrouding model's testable hypotheses.

Suggested Citation

  • Osler, Carol & Savaser, Tanseli, 2022. "Shrouding and the FX trades of global custody bank," Journal of Banking & Finance, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426622000140
    DOI: 10.1016/j.jbankfin.2022.106414
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign exchange; FX; Shroud; Bid-ask spread; Custody; Bank; Dealer; Misconduct;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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