BNY Mellon's custody clients make strategic choices when executing FX transactions based on their specific objectives: Generally speaking, custody clients have three ways to enter into FX transactions: directly negotiating with BNY Mellon, BNY Mellon's standing instruction program, or transactions with third party providers.
- Directly negotiated transactions generally refer to orders entered by the client or the client's investment manager with all of the decisions related to the transaction — usually on a transaction by transaction basis — made by the client or the investment manager.
- Standing instruction, which is at the core of litigation in New York, Virginia, Florida and elsewhere, is described in detail below. BNY Mellon entered into a partial settlement agreement with the U.S. Department of Justice regarding standing instruction FX on October 4, 2011, which can be viewed here. BNY Mellon has also added to its traditional foreign exchange standing instruction product by introducing a new defined spread standing instruction product, outlined below. The new option is not the focus of the pending litigation.
- Third party foreign exchange providers are chosen by custody clients for a substantial majority of their US dollar equivalent volume FX transactions.
Guaranteed Rates Are Published Daily, Clients Then Choose to Use Them or Not: In the traditional standing instruction product, we publish a guaranteed range of prices each morning for transactions processed through the program in the U.S. In general, investment managers can choose to opt out if they want to pursue better rates through another alternative.
- If clients use the standing instruction service, we confirm the transaction details the next day so that clients know the exact price they received for transactions that day.
- For more information about how guaranteed rates are determined and about the pricing of standing instruction FX transactions, click here.
BNY Mellon continues to evolve its product offerings to ensure that they are meeting client demand and best positioning clients to navigate an increasingly complex financial environment. Accordingly, BNY Mellon has added to its traditional foreign exchange trading product line a new defined spread standing instruction product that offers:
- Pricing based on objective rate sources where applicable, captured periodically throughout the day
- Daily, guaranteed rates that provide protection against extreme currency fluctuations
- Post-transaction reporting that includes the time at which we capture each rate, if applicable
- Trade aggregation and price netting, subject to market and program parameters
Standing Instruction Service Offers Clients Attractive Rates in a Transparent Market: BNY Mellon's traditional standing instruction service offers clients with small transactions — e.g., those that are not large enough to meet the $1 million minimum for the "wholesale" interbank market — prices that are more attractive than they typically could get for these "retail" size transactions.
- Approximately 95% of standing instruction transactions in 2010 and 2011 were for amounts below $1,000,000 and nearly all of these transactions were assigned wholesale rates within the interbank range.
- This rate is markedly more favorable than clients likely could have obtained through third-party FX providers for similar "retail" sized transactions and even exceeds what is guaranteed by our procedures for the standing instruction program, which provide that standing instruction service rates may not deviate by more than 'three (3) percent from the relevant Interbank bid or ask rates' at the time the transaction is executed.
- 93% of standing instruction transactions in 2010 and 2011 were for amounts less than $500,000; 33% were less than $5,000.
Clients Receive Other Substantial Benefits From Standing Instruction Service — Including Shifting Costs and Risks to BNY Mellon: The standing instruction service allows clients and their investment managers to outsource the costs, risks and management of certain FX transactions to BNY Mellon.
- When BNY Mellon takes on the transaction, it owns the position (i.e., the currency bought from the customer) and also the attendant risks. If a transaction fails or can't be executed within the promised range due to unpredictable currency movements or other issues in the international financial markets, BNY Mellon — not the client or investment manager - is on the hook.
- The costs to BNY Mellon of building, operating and maintaining a standing instruction infrastructure total hundreds of millions of dollars each year, and many clients choose to leverage the investments BNY Mellon has made.
- Some clients find it particularly valuable to use this service for difficult-to-execute, emerging market transactions since BNY Mellon will assume the risk of settling the transaction and the burden of complying with complex regulatory regimes. For example, 28% of standing instruction transactions in 2010 involved restricted or regulated currencies, and 36% of standing instruction transactions in 2011 involved restricted or regulated currencies.
Trading Data Shows That Clients Understand — and Use — Different Options: The trading data shows that clients and their investment managers strategically use a combination of standing instruction and directly negotiated transactions with various providers based on the specifics of a transaction and their own objectives — clearly indicating that they understand the costs and benefits of these options. For example:
- Investment managers for BNY Mellon's custodial clients used BNY Mellon's standing instruction service for less than 4% (by volume) of our clients' foreign exchange requirements in 2010 and 2011.
- Of the assets held in custody at BNY Mellon in 2010 and 2011, investment managers transacted approximately 75% (by volume) of their foreign exchange transactions with third-party providers.