Over the past few years, public investors have been keen and attentive on custodial banks’ foreign exchange practices. Public investors rely on financial institutions to uphold their fiduciary responsibilities. When investment returns were high and assets were growing, many pension funds neglected to pay much attention to custodial fees and foreign exchange costs. The global financial crisis coupled with cost pressures have opened the eyes of public pensions, sovereign wealth funds, monetary authorities, and law firms on the practices of custodial banks. Financial firms like Bank of New York Mellon and State Street have come under fire from public pension funds, endowments, and public officials regarding certain foreign exchange services and practices. In fact, in the Fall of 2009, a representative from the Alaska Permanent Fund Corporation inquired if BNY Mellon followed in similar conduct as State Street. Previously, State Street was sued by then California Attorney General Jerry Brown regarding overcharging California’s public pensions on a series of foreign exchange trades.
Foreign exchange issues with standard instruction prompted investigative action by the U.S. government and other authorities. By October 4, 2011, the New York Attorney General’s Office, the New York City Comptroller and various city pension and benefit funds filed a lawsuit against BNY Mellon. That same day the United States Department of Justice filed a civil lawsuit with charges related to mail and wire fraud alleging that they cheated clients on foreign exchange services. The civil fraud action states that the Bank of New York Mellon schemed to defraud custodial clients who used their standing instruction foreign exchange service. BNY Mellon contended that institutional investors understood the program and had the right not to participate in it. Many leading public investors do business with BNY Mellon and use their foreign exchange services, including present and past, Kuwait Investment Authority, Saudi Arabian Monetary Authority, Alaska Permanent Fund, Florida State Board of Administration, and so on.
Transparency is the enemy of financial firms and eats at their profits.
In rebuttal to the NY AG lawsuit, BNY Mellon sent out a press release stating, “Importantly, our clients and their investment managers make the decision where and how to execute foreign exchange transactions, not BNY Mellon. Our clients are smart and sophisticated institutional investors with professional investment managers who are responsible for deciding which of the numerous FX services available from BNY Mellon and other market participants they should use. If the prices we provided were not competitive, clients and their investment managers would not continue to use our services.”
What is Standing Instruction in Regards to Foreign Exchange?
Custodial banks offer “standing instruction” foreign exchange services in which the bank will automatically provide currency exchange service on as needed basis. Unlike a directly negotiated transaction, the bank unilaterally determines the price its clients receive for standing instruction transactions. According to the U.S. Department of Justice, from 2007 to 2010, the Bank of New York generated more than US$ 1.5 billion in revenues from their top 200 standing instruction clients. This business is very profitable for custodial banks compared to direct negotiated transactions. Interesting is that BNY Mellon internally knew that providing best execution and pricing transparency would dramatically reduce revenues for standing instruction transactions. The bank never provided time stamps to its clients on when the trades were executed.
Sales Margin by Year USD from BNY Mellon FX Services
|Select Public Institution||2007||2008||2009||2010||Total|
|Florida Retirement System||2,543,799||11,162,547||13,508,747||5,675,659||32,890,752|
|North Carolina State||1,991,458||4,528,278||5,019,251||4,886,609||16,425,596|
|Saudi Arabian Monetary Agency||7,474,106||5,972,295||1,501,319||14,947,720|
|Kuwait Investment Authority||2,465,689||1,082,647||597,031||4,145,367|
|Abu Dhabi Investment Authority||588,162||3,131,704||1,131,652||730,884||5,582,402|
|Alaska Permanent Fund||2,531,204||4,472,220||3,613,590||3,592,103||14,209,117|
Source: EXHIBIT A – Second Amended Complaint
Data Collective led a US$ 15 million Series A round into Salt Lake City-based Fortem Technologies, Inc., a company that works on solutions that can detect, identify and classify drones in real time to maintain airspace safety. Other investors in the round include Boeing, Mubadala Investment Company, Manifest Growth, New Ground Ventures and Signia Venture Partners.
Ibrahim Ajami, Head of Mubadala Ventures said in the press release, ” Mubadala is excited to work with Fortem and its outstanding leadership team to help grow its business to new markets.”
Ajami added, “We strongly believe the TrueView radar is essential to maintain a safe airspace for both the aircraft and the critical infrastructure on the ground.”
The Ireland Strategic Investment Fund (ISIF) and CIC Capital Corporation – a sovereign wealth enterprise (SWE) of the China Investment Corporation – announced the formation of a joint €150 million fund targeting high-growth Irish technology firms looking to expand into Chinese markets, as well as a special emphasis on Chinese companies hoping to set up shop in Ireland as a base for their European operations.
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The Council of Institutional Investor’s spring conference for 2018 – held this week in Washington D.C. at the Omni Shoreham Hotel – was packed with member-hosted panels, where nearly 400 of the top investment professional, regulators, and corporate governance experts gathered together to share their insights and engage in forward-looking discussions on how to drive a multi-stakeholder approach to responsible investment over the long-term.
Sovereign Wealth Fund Institute (SWFI) had the opportunity to attend several breakout sessions, including one presented by Maryland-based Institutional Shareholder Services that sought to address one of the most pressing challenges facing institutional investors today: How can environmental, social, and governance (ESG) criteria help drive voting at the board level? Moderated by Georgina Marshall, Head of Global Research at ISS, panelists provided a diverse array of perspectives on how to harness ESG considerations as an effective decision-making tool.
For Bonnie Saynay, Global Head of Responsible Investments at Invesco, fostering an environment conducive to communication with investment teams using a “player-coach” model is critical. Moreover, Saynay warned investors of thinking too broadly on ESG considerations, and to instead focus in on the criteria that is most important to them as an organization, and to then tailor their stewardship practices to match those priorities: “If everything is important, nothing is important,” she said.
Clare Payne, head of corporate governance for North America at Legal & General Investment Management, highlighted the importance of procuring the latest ranking data from a number of different providers, as well as how to develop one’s own internal system for scoring so as to cut through the clutter and provide a contextualized framework for making investment decisions on your own terms.
Remuneration is the name of the game for Robbie Miles, Vice President and ESG analyst at Allianz Global Investors. Amid the ever broadening scope of influence that responsible investment commands, Miles urged attendees to work with their managers on mandates that link compensation to the long-term performance of the fund, as well as long-term holding periods.
Wrapping up the panel was Stu Dalheim, Vice President of Shareholder Advocacy at Calvert Research Management, advocated for diversity at the board level across a number of different metrics – including ethnicity, gender, and professional backgrounds – in order to reflect the reality of their client base, as well as provide an apparatus for robust debate and adaptation in an ever-changing business environment.
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