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The State of California is suing State Street Corporation, alleging that the Boston-based bank overcharged two of its high-profile pension funds on securities-related FX transactions. While some are claiming that the allegations involving pension funds Calpers and Calsters are the biggest story in FX for some time, the really big issue is why it has taken what are supposedly professionally run funds so long – up to eight years, according to CNBC – to realize that they might not have been filled at a realistic FX rate.
For years, asset managers have ignored the proper management of their FX exposure. They continue to do so and it is a severe abrogation of their duty to investors. To use an awful pun, transparency is a clear issue. Buying foreign assets and then leaving it up to the bank to set the FX rate as and when it wants is always going to present temptations to the sell-side institution that has done the transaction.
Most professional players in FX, if they are honest, will admit that the custodian business has long been money for old rope.