Massachusetts Pension Drops BNY Mellon for Foreign Exchange

Massachusetts, which has accused Bank of New York Mellon Corp. of overcharging its public pension funds on small foreign-exchange transactions, hired Russell Implementation Services to handle those trades.

BNY Mellon and Boston-based State Street Corp. both competed to win the contract, according to the Pension Reserves Investment Management Board, which runs $48.1 billion in assets. Russell is a unit of Seattle-based Russell Investments.

Russell offered “substantially” lower prices to execute the trades than the two banks, Jon Carlisle, a spokesman for Massachusetts Treasurer Steven Grossman, said today in a telephone interview. New York-based BNY Mellon remains the custodian for the pension fund, he said.

Secretary of the Commonwealth William Galvin in October accused BNY Mellon of using “a hidden scheme” to maximize profits in foreign-exchange transactions at the cost of pensioners. The bank is facing lawsuits from Virginia, New York and Florida over the same issue. State Street has been sued by California and Arkansas.

Both banks have rejected the allegations and said they will defend themselves.

Kevin Heine, a spokesman for BNY Mellon, said the bank was “disappointed” to hear of Massachusetts’ decision.

“We are confident we provide all of our institutional clients and their investment managers with highly competitive foreign-exchange services,” he said in an e-mailed statement.

Standing Instruction

The contract was reported earlier today by the Boston Globe.

All the cases center on the pricing of small foreign-exchange transactions handled automatically by the banks on behalf of pension funds, a service known as standing instruction.

The banks have said they acted as a principal, selling one currency for another in arms-length transactions at a set price that customers were free to accept or reject. The plaintiffs have claimed the banks were obliged to act as an agent, obtaining for them the best possible exchange rate, and misled clients on how they set prices.

The Massachusetts pension fund has been pushing its money managers to handle more of their foreign-exchange trading through competitive bidding or negotiated trades with lower prices. Massachusetts reduced its share of trades done through standing instruction to 16 percent in the third quarter from 33 percent in the prior three months, according to documents released today by the state pension board.

4 Basis Points

Some smaller transactions, and trades in many emerging-market currencies, can’t be negotiated, according to the documents.

Russell offered to execute trades for about 4 basis points, compared with current rates of 35 to 42 basis points, the pension documents state. A basis point is one-hundredth of a percent. Russell, which doesn’t yet have the ability to trade certain emerging-market currencies, plans to increase its capacity.

BNY Mellon is offering some customers a new pricing model on foreign exchange. The Employees Retirement System of Texas last month said the bank is now willing to price trades at specific times, rather than pick a rate that’s favorable for the bank at the end of the day.

The firm reported $221 million in foreign-exchange revenue in the third quarter, about 6 percent of its total. Trades done by standing instruction account for about 2.5 percent of revenue, the bank said.

In an Oct. 19 conference call, Chief Executive Officer Gerald Hassell said that over the past two years the bank had seen an increase in the volume of standing instruction trades.

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