NYC funds pick State Street to replace BNY Mellon after FX flap

New York City pension funds have picked State Street Corp to safeguard $137 billion, replacing incumbent Bank of New York Mellon Corp , which was accused in 2011 of overcharging the funds on foreign currency trades.

New York City Comptroller John Liu on Friday announced Boston-based State Street as the next master custodian for the five pension funds. The deal is pending successful contract negotiations.

Liu also said State Street's proposal will increase audit transparency and modernize reconciliation capabilities for more than 2,000 accounts held by the five New York city pension funds.

The conversion is set to happen in the fall of 2013 after BNY Mellon's contract as the pension funds' custody bank expires.

Liu, in a statement, said State Street's bid was the lowest cost proposal among bidders. A spokesman for Liu declined to say whether BNY Mellon bid on the contract. BNY Mellon also declined to comment.

BNY Mellon is the world's largest custody bank, overseeing $26.2 trillion in assets under custody and administration.

In 2011, New York state Attorney General Eric Schneiderman and the city of New York accused BNY Mellon of overcharging on forex trades over a 10-year period. Instead of providing the best interbank rates - as it promised - NY Mellon gave the worst or nearly the worst rates of the trading day, according to their civil complaint. BNY Mellon has steadfastly denied any wrongdoing.

At the time of the complaint, Schneiderman's office said it was seeking to recover $2 billion nationwide.

New York City pension funds were among the hardest hit and lost tens of millions of dollars as a result of forex trades executed by BNY Mellon, according to Schneiderman's complaint.

(Reporting By Tim McLaughlin; editing by Andrew Hay)