by Joe Nikolson.
Within the span of the last two days, BNY Mellon Corp. (BK.N) and State Street Corp. (STT.N) have reported foreign currency (FX) revenue declines of 45 percent and 44 percent respectively. Both custody banks have cited lower volatility as a key driver. BNY Mellon CEO Gerald Hassell stated that FX revenues were impacted by lower volatility and changing client behavior.
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Lower volatility aside, it would seem more likely to be the case that the companies’ respective FX units are being significantly impacted by the discovery earlier this year that the two custody banks were overcharging customers on FX trades they executed. The changing client behavior is thus the result of the following: 1) an increasing demand from institutional clients for complete transparency regarding transaction costs; 2) lack of continued justification for legacy order handling rules (i.e. standing instruction trades and 3) an increasing use of electronic, direct market access trading platforms for execution and order management.
With respect to the last point above, Hassell was quoted stating “foreign exchange is going the route of the equity markets—more electronic, higher-speed and streaming prices to clients on a consistent basis, giving them greater optionality in terms of how they execute with us.”
The net result is that institutional investors have woken up and are quite keen to apply the same transaction cost analysis (TCA) methodologies that have been prevalent in the equities markets for years. The fallout of the bank custody FX scandals has ignited pension funds and other institutional investors to redefine their FX trading protocols and implement new resources to achieve greater understanding and transparency. As a result, firms such as ITG, FX Transparency LLC and others are finding increasing opportunities for their respective TCA offerings. This, coupled with the increased use of electronic FX execution platforms, will certainly continue to impact these custody banks.