Two states (VA, FL) charged Bank of New York Mellon with overcharging pension funds on foreign currency, or forex, transactions.  Virginia alleges the bank assigned forex rates to its pension funds that were at the extremes of daily price ranges, rather than at the actual rates for the trades, as reflected on BNY internal records.  Florida also filed a suit that makes similar charges.

What's The Big Difference?   According to Virginia's suit, the differences between charged and actual rates "generated [a] tremendous amount of undisclosed income" for the bank.  It further alleges that bank executives were aware of the practice, and supports that contention by noting that one executive wrote in an email that "standing-instruction trades" were the most profitable and that more transparency could lead to reduced fees.

BNY Mellon responds to the charges by arguing that forex clients knew what they were getting when they signed up for standing instruction services.  Standing instruction methods are typically used for transactions of less than the $1mn needed to get the prime wholesale interbank rates.

"Standing Instructions" Defined.  In an online brochure BNY Mellon says this about "Standing Instructions" as it pertains to foreign exchange services provided by the bank:

Standing Instructions captures all types of custody-related foreign exchange funding needs and automates the currency execution and settlement.  Transaction types include: securities trade settlement, income conversions, corporate actions, tax reclaims, interest postings, and residual balances.  Standing instructions provides a complete FX solution allowing clients to concentrate on their core businesses.  

We consider best execution, as it relates to the Standing Instruction process, as providing a consistent, accurate and efficient means of facilitating pre-trade, trade and post-trade activities.  These activities include identification of trade requirements, pre-trade administration associated with regulated markets, arranging settlement, reconciling discrepancies, posting cash to accounts and reporting all relevant transaction details to investment accounting systems.

Clients benefit from:

• Automatic capture of FX trade requirements from underlying custody activity.
• Pre-trade administration associated with regulated markets.
• Aggregation and netting of trades based on guidelines tailored to client needs.
• FX execution according to best execution standards.
• Settlement of cash to accounts.
• Automated sweeps of residual local currency balances into base currency.
• Automatic reporting of trade details to investment accounting systems.
• Report on FX execution in a timely and flexible fashion.

Standing instruction enables clients to automatically:

• Repatriate securities sales proceeds or fund securities purchases in all markets.
• Repatriate cash dividends and income proceeds in all markets.
• Convert interest in multi-currency cash accounts to the base currency.
• Repatriate tax reclaim proceeds.

Damages Sought.   Virginia seeks more than $811mn in civil penalties along with triple damages to the tune of $120mn. The value of Florida's suit has yet to be reported.  The lawsuits from Florida and Virginia are the most recent in a spate of legal action against custodial banks who allegedly overcharged their clients. In 2009, California sued State Street over similar claims.    [Reuters, 8/11/11]