The Forex Mess Gets Nasty


Bank of New York Mellon Corp. admits it did not act in its clients’ best interest in pricing foreign currency trades but says its clients are to blame because they knew or should have known what was going on, according to a Wall Street Journal article by Carrick Mollencamp and Tom McGinty entitled “Inside a Battle Over Forex.”

BNY Mellon is a “custody” bank that handles securities and back-office tasks for institutional investors, like the Los Angeles County Employees Retirement Association, which has accused the bank of breaching its fiduciary duty by charging undisclosed mark-ups.

A Wall Street Journal study revealed that BNY Mellon priced 58% of foreign exchange (“forex”) currency trades within the 10% of each day’s trading range that was least favorable to the fund. As a result of such practices, the Los Angeles County Employees Retirement Association paid $4.5 million more than if the average trade occurred at the middle of the trading range for each day.

BNY Mellon reportedly confirmed this fact saying that it tends to price forex trades at one end of each day’s “interbank” trading range, but said there was nothing improper about the practice.

The Los Angeles fund disagrees, saying BNY Mellon owed it the “best execution,” that is, the best possible price, and alleges BNY Mellon used a “hidden mark-up” in forex trades.

Questions have grown over whether “custody” banks like BNY Mellon are overcharging public pension funds for trading in the $4 trillion-a-day forex market.
A whistleblower group sued BNY Mellon in Virginia and Florida, and State Street Corp. in California, accusing them of improperly pricing currency trades for state and local pension funds. Attorneys general in those states took over the whistleblower lawsuits and federal agencies like the SEC are investigating, according to the article.

The lawsuits allege that BNY Mellon chose a falsified exchange rate after the fact ? one near the worst of the day for the client, rather than giving the pension fund a price based on the time of day the trade was executed. The lawsuits further allege that the bank pocketed the difference between the cost of the real trades and the “falsified FX rates” charged to the fund.

Charges for currency trades affect the value of the investment portfolios managed for the benefit of teachers, police, firefighters, librarians, mental-health workers and retirees. The Los Angeles fund manages $33 billion for 156,000 current and retired county employees.

In the Los Angeles pension fund case, the pension fund contracted for the bank to handle currency trades on an “indirect” or “standing-instruction” trades. Alternatively, fund could have negotiated its own forex trades, potentially getting a better rate.

BNY Mellon was quoted as saying the standing-instruction program “allows clients to shift the significant costs and risks associated with these transactions to BNY Mellon, regardless of size?which provides significant value to clients who don’t have the infrastructure needed to execute, settle and risk manage these transactions.”

BNY Mellon also said that many of the Los Angeles fund’s trades were smaller ones, which, if executed in the international wire-transfer market, would cost the fund 2 percentage points above the interbank rate, which would be much more than trading through BNY Mellon.

But BNY Mellon’s pricing for the fund on larger trades (above $1 million) also was skewed toward the least-favorable rate, in that over 54% of those 287 large trades were priced in the worst 10% of the range between the days’ highs and lows, according to the article.

“Any suggestion that a price within (or even close to) the interbank range is an ‘unfavorable’ rate for these small trades reflects a fundamental misunderstanding of the foreign-exchange markets,” the bank was quoted as saying.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities and commodities related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. The firm is actively investigating forex fraud claims. For further information, please contact us.