Ohio Treasurer Slashes Pension Ties With BNY Mellon, State Street, Pledging to 'Root Out Fraud'

(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.

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“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.

(March 20, 2012) — Investors have become concerned about rising inflation as the global economy appears to have stabilised, a monthly fund manager survey has found.

There was a sharp increase in the number of investors expecting inflation to rise in the coming year, according to the monthly Bank of America Merrill Lynch Fund Manager Survey. A net 13% feared inflation would rise against a net 16% last month predicting it would fall.

Michael Hartnett, Chief Global Equity Strategist at BofA Merrill Lynch Global Research, said: “The prospect of higher inflation reflects a victory of central banks in the war against deflation. Risk appetite is rising with hedge funds more active, but cash is still on the side-lines to put to work.”

This investor sentiment goes against the news today that inflation, in the UK at least, had fallen from 3.6% to 3.4% month on month. However, economists had forecasted it would drop further, to 3.3%.

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Contributing factors to the thoughts on inflation come from a stronger belief in the recovery of the global economy, with a special mention for the beleaguered Eurozone.

The survey said: “Global investors hold far fewer fears about the eurozone. The numbers naming European Union sovereign debt as their number one “tail risk” have declined sharply to 38% this month from 59% in February.”

The survey found investors within the eurozone were both more bullish about growth and far less worried about corporate profits. A net 7% expected corporate earnings in the eurozone to deteriorate in the coming 12 months, down from a net 39% in February and a net 84% in December.

Gary Baker, Head of European Equities strategy at BofA Merrill Lynch Global Research, said: “We are witnessing a rehabilitation of European growth prospects, boosted by a sharp fall in EU sovereign concerns.”

Despite fears of rising inflation, and potentially to hedge its affects, investors have begun to take on more risk. Banks and financial institutions, which are often the first stocks to lead markets out of a slump, enjoyed a second month of popularity as investors increased these allocations to their equities holdings.