The US Securities and Exchange Commission announced late last week that State Street (NYSE: STT), a global financial services holdings company and the developer of foreign exchange trading platforms Currenex and FX Connect, has agreed to pay a fine of more than $35 million. The SEC determined that State Street had fraudulently charged secret markups for transition management services, and omitted material information about the operation of its platform for trading US Treasury securities.
The SEC order finds that State Street’s scheme to overcharge transition management customers generated approximately $20 million in improper revenue for the firm. According to the announcement, State Street used false trading statements, pre-trade estimates, and post-trade reports to misrepresent its compensation on various transactions, especially purchases and sales of bonds and other securities that trade outside large transparent markets. “When one customer detected some hidden markups and confronted State Street employees, they falsely called it a ‘fat finger error’ and ‘inadvertent commissions’ in order to conceal the scheme,” the US financial regulator explained.
“Agreeing to a fee arrangement and then secretly tucking in hidden, unauthorized markups is fraudulent mistreatment of customers,” said Paul G. Levenson, Director of the SEC’s Boston Regional Office that investigated the overcharges.
Hidden last look
In a separate SEC order, the agency finds that State Street failed to inform subscribers to its government securities trading platform called GovEx that, despite marketing the system as “fair and transparent”, it provided one subscriber with a ‘Last Look’ trading function that allowed a short period of time for the subscriber to reject a match to a submitted quote. “The subscriber used Last Look to reject 57 matches that each had a $1 million face value,” the SEC elaborated. “State Street did not inform the counterparties that their orders had been rejected with Last Look. While developing Last Look, State Street even told one subscriber that the platform did not have Last Look functionality at all.”
Kathryn A. Pyszka, Associate Director of the SEC’s Chicago Regional Office, the department that investigated the GovEx-related disclosure failures, added: “Firms that run trading platforms cannot mislead subscribers about their order handling operations.” State Street Bank and Trust Company agreed to pay a $3 million penalty without admitting or denying the findings that its GovEx-related disclosure failures.”
State Street Global Markets LLC, State Street Global Advisors Funds Distributors LLC, and State Street Bank and Trust Company agreed to pay a $32.3 million penalty to settle the fraud charges for the hidden transition services markups. According to SEC announcement, State Street Corporation and certain foreign subsidiaries previously agreed to pay separate penalties to US criminal authorities and the United Kingdom’s Financial Conduct Authority (FCA).
Eyeing MiFID II
Back in June, State Street acquired FCA approval to upgrade its FX trading platforms, FX Connect and Currenex, to operate as multi-lateral trading facilities (MTFs) within the jurisdiction of MiFID II.
The approval of both FX Connect and Currenex from the FCA is an important stroke for each platform as they look to make a splash in the largest markets in Europe amidst a newer regulatory playing field. The upgrade will also improve both platforms’ ability to support and leverage the execution needs of a growing clientele. Currenex operates presently as a provider of high-performance technology and deep pools of liquidity to professional FX traders. FX Connect is an FX execution venue for institutional trading firms.