Pension funds' costs for foreign-exchange trades by custodial banks have been slashed 50% or more, a direct result of legal action taken in recent years against the banks on charges they inflated prices.
“For many years, the average cost was nine or 10 basis points per trade,” said Michael DuCharme, senior currency strategist at Seattle-based Russell Investments, which runs its own FX trading desk but also advises institutional investors on trades. “It's about 50% of that now, about five basis points. It's a remarkable turnaround in fees, a great savings for investors.”
The foreign-exchange lawsuits involved so-called standing instruction trades, for which the timing — and therefore pricing — of trades is left to the custodian, according to James McGeehan, co-founder and CEO of FX Transparency, a Framingham, Mass.-based currency risk consultant. But now that the pension fund and custodian choose the time to execute the trade and “pre-agree” to the spread, the basis-point cost of each trade could be brought to the “mid-single digits,” he said.
“Many investors have switched to more transparent methods of execution with fixed execution times and transparent spreads,” Mr. McGeehan said.
The $25.9 billion Connecticut Retirement Plans & Trust Funds, Hartford, is “in the process of developing enhanced risk management activities that require periodic reporting of such fees and analysis of such trading,” said David Barrett, spokesman for state Treasurer Denise Nappier, the pension system's sole trustee. Bank of New York Mellon Corp. replaced State Street Corp. as the system's global custodian last month.
“The Office of the Treasurer's contract with our new custodian, BNY Mellon, does not specify FX rates. Each of our investment managers are responsible for seeking and achieving best execution on FX trades, similar to best execution obligations for commissions and other negotiable expenses,” Mr. Barrett said.