Updated with correction
Consultants are advising asset owners to take a closer look at what they pay their global custodians for foreign-exchange trading after some banks responded to the increase in the value of the Swiss franc by hiking FX costs.
Such monitoring has been increasing since the rash of lawsuits beginning in 2009 against State Street Corp. and Bank of New York Mellon Corp. over improper prices for standing instruction transactions, those for which the timing and pricing of FX trades are left to the bank.
But the scrutiny heightened after the Swiss franc, often used as a global reserve currency because of its stability, became anything but stable on Jan. 15. That's when the Swiss National Bank removed its €1.20 cap on the franc, sending its value up by 40% against the euro and 30% against the U.S. dollar.
Consequently, sources said, some asset-owner clients of custodians State Street Corp. and Bank of New York Mellon Corp. were notified that costs would increase for FX trading on that currency as well as the Danish krone, which is now pegged directly to the euro but could run the risk of having that peg removed by the Danish National Bank because of the decline in the value of the euro.
Greg Fitchet, investment officer at the $2 billion Phoenix City Retirement System, said he understands the custodian's plight with more volatile currencies, but any continued increase in costs could have him look at other alternatives for FX. BNY Mellon is the Phoenix pension fund's custodian.
“I don't blame the banks,” Mr. Fitchet said. “I don't think they're trying to do anything untoward. But if costs go up, it's entirely possible we'd consider using an agency broker.”