(updated with correction)
Pension funds are focusing more on ways to reduce their foreign-exchange trading costs by negotiating better terms with their custodians — in the case of one public pension fund, bypassing the banks entirely — and requiring their money managers to get best execution on FX trades.
The move toward negotiating spot trades to settle FX conversions from using standing instruction, in which custody banks generally decide the timing and pricing of trades, began amid a spate of high-profile lawsuits. The suits, filed by pension funds against custody banks since the financial crisis, claimed the banks charged excessive fees for FX trades.
The latest lawsuit, filed Dec. 31 in U.S. District Court in New York, claims Bank of New York Mellon Corp. overpriced FX transactions on American depository receipts held by three pension plans compared with prices that were available in the market. The plaintiffs are the $18.3 billion Teamsters, Central States, Southeast and Southwest Areas Pension Plan, Rosemont, Ill.; $2.7 billion Verizon Savings and Security Plan for Mid-Atlantic Associates, Basking Ridge, N.J.; and $931 million Owens Corning Merged Retirement Plan, Toledo, Ohio. BNY Mellon, in an e-mailed statement at the time, said the suit is without merit.
However, sources said heightened pension fund interest in best execution and transparency in overall transaction costs has driven the shift, more so than the litigation.
“The best option is that the manager negotiates all FX trades. They're the fiduciary, they should have the responsibility,” said Steven Glass, president and CEO of Zeno Consulting Group LLC, Bethesda, Md., a transaction-cost analysis provider to pension funds.
Mr. Glass said RFPs from pension funds for custodial business are now more detailed in seeking FX trading pricing. Before the financial crisis, custodial banks often charged from 20 to 30 basis points for standing instruction FX trades. Now, banks are beginning pricing negotiations at 10 to 15 basis points and are willing to bring it down to keep or gain new business, he said.
One plan that requires all of its money managers to do negotiated trades is the $11.9 billion Los Angeles Water & Power Employees' Retirement Plan. Jeremy Wolfson, chief investment officer, said the move was made after lawsuits against custodians over excessive FX fees were first announced.