Shrouding and the FX trades of global custody bank

Carol Osler and Tanseli Savaser

Journal of Banking & Finance, 2022, vol. 136, issue C

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.

Keywords: Foreign exchange; FX; Shroud; Bid-ask spread; Custody; Bank; Dealer; Misconduct (search for similar items in EconPapers)
JEL-codes: F31 G14 G15 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426622000140

DOI: 10.1016/j.jbankfin.2022.106414

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