This article is provided by Alt21 Limited, trading as Alt21, an FCA authorised payments and FX provider and is intended for UK businesses considering FX hedging as part of their treasury activity. All examples provided are illustrative only and not a current or guaranteed rate. FX hedging products carry risk, including the risk that rates move against you and that you may be asked to provide collateral at short notice, which could affect your cash flow. Comments from Tom Vooght, Head of Sales at Alt21, and Chris Canning, Vice President of Sales & Trading at Alt21 are contained within the article. As Alt21 employees, their comments reflect their own experience working with Alt21’s clients and describe Alt21’s own products and approach, rather than independent market commentary. Please read the full disclaimer at the bottom of the page.
“No fee FX” sounds reassuringly straightforward. If there’s no fee, there’s nothing to pay. Right?
Not necessarily.
When it comes to FX, the amount appearing next to the word “fee” is only one part of the picture. A provider still incurs costs associated with executing and funding transactions, and those costs can be reflected elsewhere, including in the exchange rate, spread, credit terms, or wider commercial arrangements.
That doesn’t automatically make a no-fee model bad. But it does make understanding the full economics of your transaction important.
For finance teams comparing FX providers or hedging arrangements, the more useful question isn’t simply, “What’s the fee?”
It’s:
“What am I actually paying, and where does that cost sit?”
What does no fee FX actually mean?
There isn’t one universal definition of no fee FX.
Depending on the provider and product, “no fee” could mean there’s no separate transaction charge. It could mean there’s no upfront payment required to arrange a particular transaction. Or it could refer to one part of the provider’s pricing model while costs are recovered elsewhere.
But the exchange rate matters here.
FX providers typically make money through the difference between the rate available to them and the rate offered to you. This is commonly referred to as the spread or FX margin.
Imagine the underlying rate available to a provider is 1.1700, but you’re offered 1.1600.
There might be no £25 transaction fee appearing alongside that quote. But there’s still a commercial margin incorporated into the rate.
That’s why comparing FX costs based only on a stated fee can give you an incomplete picture.
A fee you can see isn’t necessarily more expensive than a cost you can’t.
Where can FX hidden costs appear?
The FX hidden costs you need to understand won’t necessarily appear as a line item on an invoice.
They can sit within several parts of the arrangement.
1. The exchange rate
This is perhaps the most obvious place to look.
A provider might advertise no transfer fee or no separate FX fee while applying a margin to the exchange rate.
That isn’t inherently problematic. Think of your FX provider as another supplier to your business. You wouldn’t expect a supplier to sell you a product at exactly what it cost them to provide it. They’ll usually add a margin so they can make a profit and continue running their business.
FX is no different.
What matters is whether you can understand the rate you’re receiving, how it compares with the underlying market rate and what margin has been applied.
If you can’t establish those things, comparing providers becomes much harder.
2. The cost of funding
Forward Contracts introduce another consideration: funding.
When a provider books a Forward Contract, it may have collateral requirements of its own with banks or other liquidity providers. Depending on the arrangement and market movements, those requirements can change over the life of the contract.
Someone has to fund that.
As Chris Canning, VP of Sales & Trading at Alt21, explains:
“If a provider isn’t taking that from the client, then obviously they’re funding that. And there’s a cost to that, which has to be incorporated into the rate.”
In other words, the absence of an upfront collateral requirement doesn’t necessarily mean there’s no economic cost associated with providing it.
The provider may be absorbing and funding that requirement itself, and its pricing model needs to account for the costs of doing so.
That brings us to one of the more confusing phrases in FX hedging.
What does “zero-zero” mean in FX hedging?
You might hear some Forward Contract arrangements described as “zero-zero”.
Broadly, this can be used to describe an arrangement where there’s no initial collateral requirement, and the customer expects not to be asked for additional collateral during the life of the trade.
From the customer’s perspective, the attraction is obvious. You can arrange a Forward Contract without allocating cash to collateral at the outset.
But there’s another side to the transaction.
The provider may still face collateral requirements from its own counterparties. If exchange rates move significantly against the position, those requirements can increase.
Chris explains:
“The counterparty, the broker, has to put more and more money in. And there’s a limit to how much they’re probably willing to put in.”
This is where understanding the hidden cost of free FX hedging becomes more useful than focusing on the word “free”.
Someone may still be taking on the funding requirement. The important questions are who, how that arrangement works and what your contractual terms allow to happen if circumstances change.
Does zero-zero mean you can never receive a margin call?
This is where you need to read the terms rather than relying on the label.
A provider may describe an arrangement as having no collateral requirement under normal circumstances while its terms reserve certain rights if market conditions change significantly.
Head of Sales at Alt21, Tom Vooght, suggests asking one very simple question:
“I know I’m getting zero-zero, but are there ever any instances where you reserve the right to call for margin?”
It’s a useful distinction because there’s a significant difference between “we don’t ordinarily require collateral” and “we have no contractual right to request collateral under any circumstances”.
Your provider’s terms and conditions should explain the arrangement.
This is important when it comes to cash-flow planning. If your finance team assumes no cash will ever need to be allocated to a Forward Contract, an unexpected collateral requirement could arrive at a particularly inconvenient time.
Knowing the conditions in advance allows you to plan around them.
The salesperson and the terms should tell the same story
There’s another useful test.
Ask the person selling you the product to explain exactly what happens if the market moves substantially during the life of your Forward Contract.
Then compare their explanation with your contractual terms.
Chris puts it simply:
“If the salesperson then comes back and says, ‘Oh yeah, we will never call you for collateral,’ yet the terms probably contradict that, then straight away that would raise alarms for me.”
You shouldn’t need to reconcile two different versions of the same product.
Clear pricing is part of transparency. Clear contractual terms are another part. The explanation you receive from your provider should help you understand both.
You may be interested in reading our blog, “The Money Behind the Rate: What Your FX Provider Is Really Asking For”
Is zero-zero actually better for your business?
It depends on what your business needs.
Removing an initial collateral requirement can make a Forward Contract easier to fund at the outset. For some businesses, preserving that cash for other operational requirements may be valuable.
But that doesn’t automatically make a zero-zero arrangement more suitable than one with clearly defined collateral requirements.
Tom suggests approaching the question from a different direction:
“Would it affect the business if you didn’t have zero-zero?”
It’s worth considering.
If your business can comfortably meet a known collateral requirement, you might place more value on understanding exactly how and when collateral works.
If cash is more constrained, the initial collateral requirement might carry greater weight in your decision.
Neither arrangement is automatically preferable. What matters is understanding the trade-off rather than assuming “zero” settles the question.
Five questions to ask when someone offers “free” FX
You don’t need to become an FX specialist to understand what you’re agreeing to.
Start with five questions:
- What exchange rate am I receiving, and what margin has been applied?
- Are there any transaction, account or other FX charges?
- How are the provider’s funding costs reflected in the arrangement?
- Could I ever be asked to provide collateral or margin?
- Do the terms and conditions match what I’ve been told?
The answers give you something far more useful than a “no fee” label. They help you understand the commercial arrangement as a whole.
Transparency is bigger than showing the spread
Transparent FX pricing matters. If there’s a margin inside your exchange rate, you should be able to see and understand it.
But transparency shouldn’t end with price.
It should extend to your credit terms, collateral requirements, onboarding process and the conditions attached to the products you use.
Tom explains:
“It shouldn’t necessarily just be that your provider is transparent on pricing. It should be that they’re transparent on everything.”
A provider can quote an attractive rate and still leave you unclear about how its credit terms work. Equally, another provider might charge a visible margin while giving you much more information about what you’re paying and why.
Look beyond the zero
By the time you’re comparing FX providers, the question isn’t whether they make money from your transaction. They’re a supplier to your business, so of course they do.
The more useful question is whether you understand how they make that money and what you’re agreeing to in return.
Look beyond the headline fee. Consider the exchange rate, the spread, the credit arrangement and the collateral terms. Understand what you’ll pay, what your provider is funding and whether any of those terms could change during the life of your hedge.
A zero can look attractive on a quote. Transparency gives you the context to decide what that zero is actually worth.
At Alt21, we believe transparency should extend beyond the number on your FX quote.
Our platform is designed to give you upfront pricing information and visibility into how your currency management works, with experts available when you need them. As with any FX product, whether it’s the right fit will depend on your business’s circumstances.
ALT21 Limited is authorised and regulated by the Financial Conduct Authority (FRN: 783837) and is a company registered in England and Wales (number 10723112). The registered address is 45 Eagle Street, London WC1R 4FS, United Kingdom. This article has been produced by ALT21 Limited for information purposes only. It does not constitute financial advice or an offer to sell or the solicitation of an offer to buy any products referenced. Hedging products are not suitable for every business. Before entering into any FX product, you should consider whether it is appropriate for your needs and circumstances. ALT21 Limited assumes no liability for errors, inaccuracies or omissions. Eligibility criteria and terms and conditions apply to all products and services offered by ALT21 Limited. Not all applications will be accepted.
