* Fidelity and others dig for FX price details
* BNY challenges Justice Department logic in FX lawsuit
* Electronic FX trading gains prominence, but hurts profits
By Tim McLaughlin
BOSTON, Nov 28 Fidelity Investments is pushing
BNY Mellon Corp and other custody banks for stricter
pricing on certain foreign currency trades, the latest sign of
how big investment managers are using the same tactics as public
pension funds to cut expenses.
BNY had been taking advantage of customers like Fidelity and
overcharging on so-called standing instruction FX trades,
according to lawsuits filed by the U.S. Department of Justice
and others. Now customers are paying more attention, putting
pressure on the bank's revenue.
Fidelity, the second-largest U.S. mutual fund company, has
not filed a lawsuit of its own, but the firm is not waiting
around for the litigation to wend its way through the courts,
The Boston-based firm is now requiring more data from BNY
and others about the specific timing and pricing of any
foreign-exchange trades that aren't directly negotiated,
Fidelity spokesman Steve Austin said. And Fidelity has enhanced
its forex cost analysis as it works to lower expenses for its
mutual fund investors, Austin added.
In the U.S. District Court in the Southern District of New
York, BNY Mellon is battling the Justice Department, which is
pursuing a $1 billion-plus civil fraud case against the bank.
The bank argues in court filings its trade-pricing policies were
permissible and did not violate any laws.
BNY Mellon spokesman Kevin Heine declined to comment on
Fidelity, but said BNY foreign-exchange products continue to
evolve in response to client demand and marketplace changes.
Large investors typically negotiated specific pricing only
when trading large amounts of foreign currency at a time. But
for most smaller transactions, say the conversion of a dividend
payment received by a U.S. fund from a non-U.S. stockholding,
investors relied on so-called standing instructions that gave
the banks leeway in pricing.
Peter Weiler, head of global sales for Abel Noser Solutions,
which analyzes the cost of foreign-exchange trades, said mutual
fund boards, for example, are keen to know how their costs stack
up against industry peers.
"Interest has really taken off in the last 12 months or so,"
Fidelity ranked as one of BNY Mellon's largest standing
instruction forex customers, according to the DOJ's lawsuit. The
mutual fund giant lost more than $50 million on standing
instruction trades with BNY Mellon from 2007 to 2010, according
to DOJ filings.
Meanwhile, BNY Mellon's foreign-exchange business, once one
of its most lucrative operations, is doing a fast fade. In the
third quarter, BNY Mellon's total revenue for all types of
foreign-exchange trading was $121 million, a year-over-year drop
of 45 percent.
Before the flurry of lawsuits, revenue from foreign exchange
and other trading activities accounted for as much as 12 percent
of the bank's total fee revenue. It was about 6 percent in the
third quarter, the bank said in financial statements.
BNY Mellon and other custody banks embroiled in litigation
like State Street Corp also have been hit by a becalmed
foreign-exchange market, where volatility is far below the
levels seen in 2008 and 2009, reducing the volume of trading.
And the banks are dealing with a wiser clientele, thanks to the
many lawsuits that have exposed their big profit margins. As a
result, customers are finding cheaper ways to trade, including
on electronic platforms, which BNY and State Street provide.
A NOVEL STRATEGY
Although Fidelity has not joined any of the foreign-exchange
trading lawsuits, the Justice Department cited its losses as a
key argument in recent legal briefs in the case against BNY
That is because prosecutors are pursuing a novel use of a
statute originally designed to protect financial institutions
following the 1980s savings and loan crisis, attorneys said.
The Financial Institutions Reform, Recovery and Enforcement
Act (FIRREA) was intended to protect federally insured deposits,
so the DOJ's latest brief emphasizes BNY clients, including
Fidelity, that have at least some banking activities.
The statute helps prosecutors because it provides a 10-year
statute of limitations rather than a traditional five-year
period. Under FIRREA, the government can recover civil
penalties, up to $1 million for each violation or up to $5
million for a continuing violation.
"FIRREA is a very powerful statute. The Justice Department
is broadly interpreting the statute, stretching it in ways not
originally contemplated," said Adam Lurie, a partner in
Cadwalader, Wickersham & Taft LLP, who recently served as a DOJ
white-collar crime prosecutor.
Lawyers for BNY Mellon, in legal papers and background
discussions with journalists, say the government can't prove
that the bank's alleged foreign-exchange fraud imperiled any
financial institution's federally insured deposits.
BNY cited Franklin Templeton's $4.8 million alleged
loss from standing instruction trades in 2010, for example. The
loss was inconsequential because profits that year were $1.4
billion, BNY's lawyers wrote.
"Absent concrete allegations, it is simply implausible that
a comparatively tiny loss, 0.33 percent of profits ... would
have had an effect - let alone a sufficiently direct one - on
Franklin Templeton's federally insured subsidiary," BNY Mellon
lawyers said in recent court filings.