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Diving into BNY Mellon’s Legal FX Issues Involving Pensions and SWFs

Preet Bharara

Preet Bharara

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

UNICEF and NBIM to Host Meetings on Children’s Human Rights

The United Nations Children’s Fund (UNICEF), a United Nations programme headquartered in New York City, has partnered with Norges Bank Investment Management (NBIM) to facilitate a series of meetings between companies to discuss issues surrounding children’s human rights.

According to the news release, “the network will facilitate dialogue between leading brands and retailers in the garment and footwear industry to strengthen children’s rights.”

NBIM is invested in many listed companies and have invited them to join a network to tackle these issues. Over the next two years, the organizations plan to hold three workshops as well as quarterly meetings surrounding these issues.

“Over time, we hope and expect that the network will contribute to improved market practices among companies and greater respect for children’s rights,” says Carine Smith Ihenacho, Global Head of Ownership Strategies, in a NBIM press release.

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SouthGobi’s CEO Arrested, CIC Struggles with Investment

The China Investment Corporation (CIC) has long struggled with its investments in coal assets, specifically in globally-listed coal miner SouthGobi Resources Ltd, which operates its flagship coal mine in Mongolia. In November 2009, CIC and SouthGobi Resources inked a convertible debenture deal. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Qatar Central Bank Deals with MSCI

MSCI, a stock index company whose benchmarks influence investor behavior, has tremendous indirect power impacting the stock markets of smaller economies. In 1988, MSCI released its emerging markets index, a now-widely-used benchmark for many institutional investors wanting access to growth markets. China and South Korea make up the majority of the benchmark, but smaller economies such as Poland, Chile and even Qatar make up other pieces of it.

[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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