CalPERS, the California pension system at the heart of a $56 million lawsuit against State Street that claims the custodian overcharged it on FX fees, has reappointed State Street as its master custodian.
The new contract will cost CalPERS roughly $1 million more per year due to its increased reporting requirements, according to a spokesperson for the pension system.
The contract, which was agreed upon in December, signed in spring and came into effect July 1, is worth approximately $5.7 million in yearly fees for State Street. The previous contract, valid for three years, was signed in 2006 and further extended for two one-year terms until it ultimately expired at the end of June.
Clark McKinley, the CalPERS spokesperson, told Global Custodian the pension system paid between $4 million and $5 million yearly on the previous contract.
BNY Mellon and J.P. Morgan also bid for the contract, but State Street apparently offered a better value.
The State Street service offering was considerably better valued than the next two competitors that were finalists in this competition, to the fact that it was approximately one half the estimated total annual cost of the next nearest competitor, Matthew Flynn, division chief for operations, performance & technology at CalPERS, said during a meeting of the CalPERS investment committee in December, according to a transcript of the meeting provided to GC.
At first glance the renewed contract may seem paradoxical, given the ongoing lawsuit between the two entities. When the final one-year extension of the former contract was agreed in 2010, California State Treasurer Bill Lockyer went so far as to say in a CalPERS board meeting: Im just not sure that we ought to be doing business with [State Street] given that circumstance. I guess we do business with crooks.
But CalPERS says today the pension system pre-negotiates the vast majority of its foreign exchange trades, with only 2% utilizing the indirect FX service offered by State Street. CalPERS has been handling the vast majority of our foreign exchange trades internally since 2003, says CalPERS Investment Officer Joe Dear. Moving the trades in house means that we can avoid any issues or conflict that might arise when external managers are used.
In other words, for the most part, CalPERS no longer uses the FX service over which it is suing State Street.
The lawsuit references trades dating back to 2001, when the pension system consequently relied more heavily on State Streets indirect FX transaction service.
The chief claim in the suit, which State Street denies, is that the custodian charged daily peak rates on FX fees rather than the actual exchange rate at the time of individual trades. Similar claims have been filed by pensions against State Street in Arkansas and against BNY Mellon in Virginia, Florida and Pennsylvania.
For its part, State Street says it enhanced pricing transparency on its indirect FX services in late 2009, when it launched comprehensive pricing dataincluding markups and markdownson individual clients Web portals. In addition, on the day after a trade is executed, State Street provides for each currency pair the reference interbank rates and the times at which they are obtained, the actual rates, the daily high/low range at the time of pricing, where applicable, and the actual markup or markdown that was applied, a spokesperson told GC. While we have leveraged more technology tools to deliver price transparency, our clients have always been able to determine the pricing they received on a FX trade on the day following actual execution.
Regarding the CalPERS mandate, the spokesperson commented only, Were delighted to extend our relationship with a longstanding client.
Christopher Gohlke