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Fidelity moved trades away from BNY Mellon

Foreign-exchange business shifted in ’09

The controversy over foreign-exchange trading costs had not yet made headlines in September of 2009. But Fidelity Investments was already shifting trades away from a major player in the arena, Bank of New York Mellon Corp.

Internal e-mails among BNY Mellon executives at the time show “significant lost business’’ at the bank from Fidelity’s institutional arm, Pyramis Global Advisors and Fidelity Canada. The e-mails detail the bank’s efforts to keep the powerhouse client by slashing prices - and then returning prices to “normal’’ when the effort failed.

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BNY Mellon is fighting allegations from a number of public pension plans that it overcharged for foreign-exchange services and misled clients about its practices. The e-mail exchange about Fidelity, among documents obtained by the Globe, highlights how bank executives scrambled to hang onto the lucrative business and how Fidelity may have suspected the big price markups.

“My bet . . . is that Pyramis realized they had a gap,’’ BNY Mellon’s foreign exchange executive in Boston, David Green, wrote on Sept. 25, 2009, in an apparent reference to pricing. He said Pyramis had probably started handling trades through Fidelity’s own large foreign-exchange desk.

Green went on to say, “Since we are again losing volume to third party,’’ the Fidelity/Pyramis account should “immediately return to normal pricing.’’

At the heart of the foreign-exchange controversy are so-called standing instruction trades. These are transactions that managers such as Fidelity outsource to large banks, instead of negotiating each one individually with other parties. The $4 trillion-a-day foreign-currency trading business is driven in large part by investors buying and selling stocks and bonds in foreign countries - and needing to change dollars into euros, yen, and less common currencies at the same time.

Fidelity, based in Boston, in response to an inquiry by the Globe, acknowledged in the most public way yet that it has sought to cut back on the costly outsourcing of foreign exchange trades, known in the industry as FX.

‘We have been moving away from non-negotiated custodian [foreign exchange trades] for a number of years.’

Vincent Loporchio Fidelity spokesman
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“We have been moving away from non-negotiated custodian FX for a number of years, beginning before allegations against custodian banks became public in 2009, and continuing since then,’’ Fidelity spokesman Vincent Loporchio said.

BNY Mellon spokesman Kevin Heine said in a statement, “The foreign exchange market is extremely competitive and clients and their investment managers have full discretion over how and whether to use our foreign exchange offerings.’’

He noted that the bank offered tailored services for “specific client needs,’’ and that a “handful of e-mails cherry-picked out of context from among millions’’ disclosed in a Florida lawsuit, did not reflect the way it does business.

The e-mail exchange occurred in late September 2009, a month before the unsealing of a lawsuit that cast a spotlight on foreign-exchange trades. California’s state pension funds had filed the lawsuit against another large bank in the foreign-exchange business, State Street Corp. of Boston. Similar lawsuits have since been filed against BNY Mellon in Virginia, Florida, New York, and Massachusetts.

Both banks have denied the charges and are fighting them. In New York, the attorney general filed a $2 billion lawsuit against BNY Mellon. Here in Massachusetts, Secretary of State William F. Galvin has sued the bank to recoup about $29 million in alleged overcharges on foreign exchange for the $48 billion state pension fund.

The whistle-blowers have alleged that BNY Mellon and State Street charged clients at the highest rate each day, instead of at the actual prices at which trades were made. Clients, meanwhile, say they were led to believe they were getting the best possible prices.

BNY Mellon chief executive Gerald Hassell, in recent public comments after a speaking engagement in Boston, suggested that managers such as Fidelity knew they were paying higher prices for smaller trades and those in restricted currencies - like consumers paying more at convenience stores.

“The investment managers are the ones who make the decision to use us or not, and they’re actually the ones who bear the fiduciary responsibility to act well on behalf of their clients,’’ Hassell said in November.

Fidelity Investments vice chairman Abigail Johnson was among the executives in attendance at the event. Asked by a reporter whether the foreign-exchange matter was of concern to Fidelity, Johnson declined to comment but, looking toward Hassell said, “You’d better ask him.’’

Fidelity’s Loporchio said the firm’s foreign-exchange desk handles the “vast majority’’ of those trades for the firm’s mutual funds, and for some institutional accounts. He said that, “like others in the industry, we are monitoring information and allegations concerning custodian bank practices.’’

Beth Healy can be reached at bhealy@globe.com.
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