Ohio Treasurer Josh Mandel has replaced BNY Mellon and State Street with J.P. Morgan and Citi as custodians for four public pensions in the state.
The move follows last weeks $16 million lawsuit filed against BNY Mellon by Ohio Attorney General Mike DeWine, who claims the custodian overcharged the Ohio School Employees Retirement System and the Ohio Police & Fire Pension Fund on FX transactions.
I feel that I have a duty to end custodial agreements with banks being sued for defrauding taxpayers, the treasurer said in a statement. Ohio has not sued State Street, but the custodian, along with BNY Mellon, has been sued by several other public pensions who make the same claims of FX overcharging. It is believed to be the first time a pension has fired a custodian over the claims.
J.P. Morgan and Citi have not been accused of overcharging on FX.
While J.P. Morgan declined to comment on how the mandate win came about, a Citi spokesperson said the firm responded to a request for proposal (RFP) in February that Ohio issued in January seeking a new custodian for the pensions. BNY Mellon and State Street both declined to comment on when they found out the pensions were switching to a new custodian.
Treasurer Mandel said in the statement that he requested an investigation last year into whether the custodians of Ohio pensions had been exploiting pension funds when conducting foreign currency exchange transactions. The result of that investigation was the attorney generals lawsuit against BNY Mellon, filed March 12. [Attorney General Mike DeWines] findings reinforced my decision to designate new international custodians for Ohio pension funds to safeguard retiree and taxpayer dollars, Mandel said in the statement.
A spokesperson for the Ohio treasurer did not immediately respond to multiple requests for comment.
A statement by State Street that Ohio remains a valuable client suggests the service provider still provides some services to the state, but the custodian would not elaborate.
J.P. Morgan will be the new custodian for the Ohio Public Employees Retirement System (whose former custodian was State Street) and the Ohio Police & Fire Pension Fund (State Street), while Citi will serve as the custodian for the School Employees Retirement System (BNY Mellon) and State Teachers Retirement System (State Street). State Street and BNY Mellon managed $41 billion in the four pension funds, according to reports.
In separate statements, J.P. Morgan and Citi both said they are proud to have been selected as custodians by the state of Ohio.
Were disappointed by the treasurers decision because we believe we have provided the state with valuable services at competitive prices, BNY Mellon said in a statement. As we have stated previously, the suit by the Ohio attorney general recycles baseless allegations, and we are confident we are right on the facts and the law.
BNY Mellon settled a lawsuit with the Justice Department in January, agreeing to disclose more information about the way it prices FX transactions. Analysts called the settlement a win for BNY Mellon, because the custodian is already transparent about the way it prices its FX transactions, they say. Similarly, State Street in recent years has increased transparency around the way it prices and reports its FX transactions.
Javier Paz, senior analyst at Aite Group, told Global Custodian earlier this year that custodians should not take all the blame when FX transactions are believed to be unfairly pricedpension funds themselves should be held accountable too. They [pensions] also made a lot of agreements without the proper due diligence, Paz said. They should be accountable for that as well, and not just blame it on the banks.
(CG)