(March 20, 2012) — Four Ohio pensions have slashed ties with BNY Mellon and State Street after accusations have grown increasingly loud over currency trading.
The Ohio Treasurer has approved JPMorgan & Chase Co. and Citigroup Inc. to serve as the replacement custodians.
“As chief watchdog of OH tax dollars I will root out fraud where I see it,” said Josh Mandel on his Twitter page, referring to the Ohio Treasurer’s decision to end relationships with the two mammoth banks, which hold more that $41 billion in international assets owned by four of Ohio’s five pensions.
Last week, the Ohio Attorney General’s office filed a lawsuit — seeking damages of more than $16 million — against BNY Mellon, accusing the bank of overcharging the Ohio Police and Fire Pension Fund and the School Employees Retirement System of Ohio on foreign currency transactions. Meanwhile, State Street, the third-biggest custody bank, is being sued by the US Department of Justice along with other states over aspects of its disclosure policy relating to its foreign exchange services.
“As a result of my office’s investigation into this matter, our complaint alleges that BNY Mellon violated the terms of their custodial agreements with the Ohio funds, and exploited the volatility of the foreign currency market to their advantage at the expense of Ohio pensioners and their families,” said Attorney General DeWine in a statement released last week.
The release continued: “At issue in the suit is BNY Mellon’s ‘standing instruction’ service, whereby the pension funds and other clients allow the bank to unilaterally handle their FX transactions. The complaint alleges that BNY Mellon collected the currency trades for their ‘standing instruction’ clients and then later in the day set the price that was most favorable to the bank. The prices were often at or near the day’s least-favorable exchange rates, with the bank profiting from the difference.”
Despite the accusations, BNY Mellon and State Street have defended the pricing of their FX services through their use of standing instruction orders. “Most FX transactions are negotiated directly between an FX dealer bank and an investment manager. For about 5% of the trades, custodians claim, the investment manager will ask the end-user client’s custodian to deal with the transaction—often because it’s an odd lot of shares, or the security in question creates some other hardship,” aiCIO reported in February. This justifies charging slightly more for standing instruction FX transactions, the custodians assert.
From aiCIO Magazine’s February Issue: State Street’s transition management problems have been revealed, but ConvergEx will soon take the lead as the posterboy for the industry’s misdeeds.