Leading custodial institutions have felt the pinch from lower volumes of foreign exchange as the buy-side raises concerns about being overcharged.
BNY Mellon asset servicing revenues dropped to U$885 million in Q4 2011 compared to $908 million in the same quarter in 2010 as FX revenue sank by 11% year-over-year to $183 million, declining 17% from the quarter before.
Part of the reason for lower volumes is likely loss of some FX business due to accusations that the custodian overcharged its customers on FX transactions. In the latest example made public, Massachusetts Pension Reserves Investment Management (MassPRIM) is said to have moved some of its FX transactions from BNY Mellon to Russell Investments. BNY Mellon is presently fielding a lawsuit by the Massachusetts attorney general on behalf of MassPRIM, which claims the custodian overcharged it on FX transactions.
At State Street, foreign exchange trading revenue decreased 12% in the fourth quarter, “primarily due to a shift in mix,” the bank said, while Northern Trust FX trading income declined to $72 million from $87 million the prior quarter, as currency volatility declined towards the end of the quarter and client volumes thinned.
“Indirect FX transactions have come under client scrutiny amid several law suits that have been filed against BNY Mellon and State Street,” Brad Hintz, a senior analyst at Sanford C. Bernstein. “FX revenue declined sharply for all three trust banks. Lower volatility and weak client volumes were largely to blame, though State Street and BNY Mellon noted that they are now observing declines in indirect (standing instruction) FX transactions.”
Reporting by Christopher Gohlke, Global Custodian, an Asset International publication