After String of Lawsuits, Mass. Pension Joins FX Trading Probe

(June 1, 2011) — Following a string of lawsuits over FX trading, the Massachusetts state pension fund has hired an independent consultant to investigate foreign exchange trading activity over the past two years.

“Our staff has looked at FX trades on a surface level, but there’s been a lot of momentum in the last few years to more closely examine this, so we wanted someone to look at FX full-time,” MassPRIM’s CIO Stanley Mavromates told aiCIO. “We hired an independent party to review FX trades for the last two calendar year,” he said, noting that the fund hired FX Transparency at the end of April, and expects a report analyzing the pension’s last two years of FX trades in mid-June. “Depending on what the results look like, we may keep the firm on board.”

Since 1999, BNY Mellon has served as the custodian for the $49.5 billion Massachusetts pension, which has been looking into foreign exchange pricing over the past 18 months. When asked about the solution to banks overcharging their customers for FX services, Mavromates said that custodians could be required to disclose more information on trades. “This is a huge market — perhaps the most liquid market in the world,” he said.

Some industry observers are not optimistic that the greater scrutiny over FX activity will solve the problem. “This isn’t a perfect world, and despite greater scrutiny, this problem will persist,” Chris Havener, Founder & Managing Director of Royal Oak Capital Management, told aiCIO in late May. “This is the problem when you have people running other people’s money. Even though banks have a fiduciary responsibility to their clients, pension funds have dropped the ball on this…Perhaps, but not likely, this will serve as a wake-up call to act upon their naivety.”

Last month, the Securities and Exchange Commission (SEC) began probing whether two of the world’s largest custody banks — State Street and BNY Mellon — made proper representations to pension fund clients about the manner in which their currency trades were handled and priced.

Regarding the pricing of its foreign-exchange transactions, State Street has already been sued by California and the Arkansas Teacher Retirement System for alleged fraud. Filed in early February in the US district court in Boston, the suit alleges that State Street, the custody bank for more than 40% of US public pension funds, violated state law by overcharging customers for currency trades. According to the suit, the bank generated as much as $500 million in profits annually — a rate of profit that accounts for about 50% of State Street’s foreign exchange profits over the last decade. In response,  the Boston-based company said it is “firmly committed to providing its clients with quality service and transparency in meeting their FX needs. We will vigorously defend the allegations made in the complaint and we stand by our business practices.”