The foreign exchange manipulation scandal involving major global banks demonstrates that at their core, currency conversions are not merely operational processes. They are significant drivers of value that must be carefully managed. Pension boards and investment managers should undertake to ensure their FX spot execution practices are designed to preserve and protect this value.
In May, five major banks agreed to pay $5.6 billion and plead guilty to felony charges brought by the U.S. Department of Justice in connection with FX manipulation. For globally invested asset owners and other institutional investors, this scandal should be a wake-up call to ensure their own currency trades do not fall prey to similar value-destroying schemes.
This scandal is the largest in terms of fines and a string of bad headlines in the FX market over the last decade. Many venerable institutions, including the California Public Employees' Retirement System and the New York City Retirement Systems, have lost millions from bad FX pricing received from custodian banks in recent years.
Unfortunately, our experience suggests common business practices among many asset owners and other institutional investors have not yet evolved to reflect lessons learned from these FX trading violations. But with the ink now dry on the plea agreements emerging from the most recent scandal, the resounding imperative for institutional investors is that they must re-examine their FX practices to avoid predation.