It’s not been a good week for State Street. As well as a fall in revenues (see State Street reports fall in trading revenue), the Boston-based bank is being sued by the State of California, which is alleging that State Street overcharged two of its high-profile pension funds on securities-related FX transactions. Several sources contacted me asking what I thought about ‘the biggest story to hit FX since, well, the last one’.
One of them, Integral’s Matthias Beckmann, says: “This came to light because of whistleblowers. We take this as validation that there is a strong need for TrueFX and its free historical and streaming real-time data to increase transparency and the safety of FX market participants.”
Beckmann may be wearing his PR hat, but he does have a point. And this incident goes a long way to support some of my recent ranting about how everyone in FX should be concerned about the impact of acts that portray the industry in a bad light. However, I disagree with the claim that the allegations over CalPERS and CalSTERS, as the funds are known, are the biggest story in FX for some time.
No, the really big issue is that it has taken what are supposedly professionally run funds so long (apparently up to eight years, according to CNBC) to realise that they may not have been filled at a realistic FX rate and – shock horror – this has cost them money. They do love an acronym in the US, but I’d suggest that these two funds would have been better known as CalSTUPID and CalSTUPIDER.
For years, asset managers have ignored the proper management of their FX exposure. They continue to do so and it is a severe abrogation of their duty to investors. To use an awful pun, transparency is a clear issue. Buying foreign assets and then leaving it up to the bank to set the FX rate as and when it wants is always going to present temptations to the sell-side institution that has done the transaction. “Bonuses don’t grow on trees, you have to pick a pocket or two,” was what we always used to sing at Midland when we had such an opportunity.
Most professional players in FX, if they are honest, will admit that the custodian business has long been money for old rope. Somewhat inaccurately, I predicted that this particular gravy train would come to an end once MiFID was introduced in Europe in November 2007. This makes it clear that any securities-related transaction is subject to best execution rules. What constitutes best execution is an ongoing debate, but what it is not is a fill just below the high or just above the low of the day.
Interestingly, as I reported back in March 2008, the Autorité des marchés financiers (AMF), the French regulator, ordered financial institutions to include the currency amount for settlement when they report their transactions. “Because the trades are time-stamped, it allows customers to easily check if they are being ripped off somewhere along the deal chain,” I wrote. Bets must be on that other regulators will introduce similar requirements.
