Category Archives: Regulation

Custodian Banks vs. Pension Funds — A Comment on The Ongoing Discussion, And The Most Recent WSJ Article

On May 23, the Wall Street Journal published a front page story: “Inside A Battle Over Forex” by Carrick Mollenkamp and Tom McGinty.

“Bank of New York Mellon Corp. has been fighting accusations that it took advantage of clients while trading currencies,”  it began.  “A Wall Street Journal analysis of more than 9,400 trades the bank processed over the past decade for a large Los Angeles pension fund could provide ammunition to its critics.”

The article advances recent reporting about lawsuits filed by public pension funds against custodian banks, alleging that the banks had fleeced the public funds on fees by filling FX trades at disadvantageous (though arguably legal) prices over many years.   The Journal’s article of May 23 seems to offer proof.   The newspaper filed a freedom of information request with the Los Angeles pension fund for its FX trading records and examined more than 9,000 trades.  Even the bank in question “confirmed the accuracy of the data and said the bank’s employees ‘tend’ to price foreign-exchange trades at one end of each day’s “interbank” trading range…”

Particularly interesting is the bank’s response that clients like the Los Angeles pension fund knew—or should have known—that the bank doesn’t act in their interests when pricing the trades.

There will no doubt be further calls for increased regulation to induce change in FX market practices.  But in my view more powerful and faster remedies are education and the use of available technology to fight imbalances caused by information asymmetry.

Yes, global foreign exchange markets are opaque and difficult to navigate but technology has greatly increased transparency. On our system, pension funds can see their custodian bank’s price feed and those of its competitors, in real time,  on one screen and draw their own conclusions. By bringing to bear all the advantages of modern technology, including access to a shared IT infrastructure, data centers, and support, we have dramatically lowered the cost and barriers of entry for new market entrants to deliver a highly competitive global FX offering. My advice to pension funds is that if your particular provider is not competitive, switch to an institution that is. Multi-venue platforms like Integral’s FX Grid are aggregating and displaying prices across the market from hundreds of sources of global FX liquidity and offer a clear alternative to the single-bank systems like the one on exhibit in your article.

The combination of free historic data and real-time market movements are sufficient to help pension funds become educated and turn themselves into informed market participants. As importantly, a price provider on our platform knows that they are always doing it in competition with others. Thus, competition is built-in. What better way to ensure fair treatment through market self-regulation?

To paraphrase a famous philosopher:  “Fleece me once, shame on you.  Fleece me thousands of times a day, shame on me.”

Here’s a link to the original article.

From Stonehenge to the Asteroid belt or How FX Markets Have Changed

FX markets have come a long way. In the late 1980s and 1990s, the market resembled Stonehenge in that a few silos dominated the landscape. They were, in fact, the market. It was a very static affair with high barriers of entry and almost no difference in what the few banks offered. Today’s market looks more like our solar system’s asteroid belt. There are thousands of market participants that come in all shapes and sizes. They are independent but connected entities. Barriers to entry are low. As a result, the entire market is in a state of flux which fosters innovation. Customers have many choices and competition is strong.

The original banks are still around. I liken them to the planets; a small number of larger entities that still dominate the area around them but exert much less influence on the market at large.  In FX, like in other markets before it, a number of forces came together to affect this change. Continue reading From Stonehenge to the Asteroid belt or How FX Markets Have Changed