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
Robert Priestley who was a member of Australia’s Future Fund Board of Guardians has resigned. He is the former the Chief Executive Officer of J.P. Morgan Australia and New Zealand (left in May 2017). He also resigned from his director role at ASX Limited. Priestley remains the non-executive chairman of J.P. Morgan Australia and New Zealand.
In a released statement by Priestley, he said, “Given my decision to step aside from the ASX board, I think it is also appropriate that I step aside from the Future Fund board of guardians.”
Australia and New Zealand Banking Group Ltd (ANZ) is in hot water with Australian regulators, facing criminal cartel charges on an ill-fated institutional placement. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
State Street Launches Real Assets Fund Services Group
State Street Corporation formed a real assets fund services group in anticipation of further growth in world of global infrastructure investing. This newly-formed group will leverage the company’s existing real estate platform.
Cadillac Fairview Unveils Massive Building Project – Slated New HQ for OTPP
Cadillac Fairview is a real estate unit of the Ontario Teachers’ Pension Plan (OTPP). Cadillac Fairview, in a partnership with the Investment Management Corporation of Ontario (IMCO), revealed the construction of a new 46-storey office tower at 160 Front Street West, on the northeast corner of Front Street and Simcoe Street in downtown Toronto. This new building will be the headquarters of OTPP at 160 Front Street. This C$ 800 million development will be one city block from Union Station.
James Edwards Head to BMO Global
James Edwards was hired by BMO Global Asset Management to be director of U.K. sales. Previously, Edwards was a Fixed Income Product Specialist at BlackRock.
Peter Diamond Exits Deutsche Bank
Peter Diamond is exiting as Head of SSA Origination and Structuring at Deutsche Bank – a position he had in London.
Hideharu Ichii Joins AMP Capital
Hideharu Ichii left APG Asset Management Asia to join AMP Capital, effective July 2, 2018. Ichii took the position as a Portfolio Manager on AMP Capital’s global listed equity team in Hong Kong. Ichii was a Senior Portfolio Manager in listed real estate Asia-Pacific region at APG.
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Shenyang SUNAC Xinxing Enterprise Management acquired a stake for US$ 43 million in the Keppel Township Development (Shenyang) Co. Ltd. from Keppel Corporation.
The island country of Mauritius plans to offer foreigners a chance to obtain country citizenship in exchange for a non-refundable contribution of US$ 1 million to the national sovereign wealth fund. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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