"Indirect foreign exchange" execution methods under scrutiny.
State Street Bank revealed today in its annual 10-K filing (see page 20) with the SEC that the New York Attorney General has "made inquiries to us about our indirect foreign exchange execution methods."
State Street further expects that plaintiffs will "seek to recover their share of all or a portion of the revenue recorded from providing indirect foreign exchange services." For 2011 that was about $331 million.
State Street and rival Bank of New York Mellon have been hit by lawsuits accusing them of improperly charging pension funds for foreign exchange, according to Reuters.
At issue are the prices which custody banks have charged on so-called "non-negotiated" FX trades. Pension funds and U.S. authorities have accused the custody banks of misrepresenting the pricing on the trades. The banks have denied any wrongdoing, but they also have changed their practices.
Issues like this one, in our view, are driving institutional and corporate customers away from banks for their currency conversion needs, and into the arms of the Forex ECNs and other multi-bank platforms, where clients are (virtually) assured of getting the best real-time FX rates on their transactions. Continued bad press for banks surrounding their FX practices should bode well for firms such as recently IPO'd FXall and, ironically State Street's subsidiary Currenex and FX Connect.