State Street, the world's second largest asset custodian, is setting aside $618 million (£313 million) to cover potential legal claims against its fixed income investment arm due to "unprecedented events in the credit markets".

William Hunt, who became chief executive of State Street Global Advisors in January 2005, has resigned with immediate effect.

He will be replaced on an interim basis by James Phelan who is currently the vice president and head of international operations for investment servicing, research and trading at State Street, which is one of America's oldest financial houses after being founded in 1792. At the end of the third quarter, State Street had $11.85 trillion worth of funds under custody and $2 trillion of funds under management.

The Boston-based lender said today it has set up the legal fund because of the underperformance of "certain active fixed-income strategies" managed by State Street Global Advisors (SSgA) and to address "customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent".

The $618 million fund will impact State Street's fourth quarter earnings by $279 million.

In August, State Street admitted it had a $22 billion exposure to asset backed commercial paper conduits - packages of short term loans backed by credit card or sub-prime home loan debt - giving the bank the largest exposure at that time of any US or European lender.

Ronald Logue, chairman and chief executive at State Street, said today: "We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages.

"Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies."

State Street is the latest bank to face legal action over exposing investors to sub-prime debt.

In December last year, Barclays filed a claim against Bear Stearns to claw back $400 million it lent to two hedge funds run by the Wall Street bank which collapsed in the summer due to their exposure to sub-prime debt. Citigroup, Merrill Lynch and UBS are also facing potential lawsuits.

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