A multi-year trend of consolidation has been seen in asset service provision post-crisis, with at least 25 mergers: some amongst administrators and others between them and different service providers, such as technology firms. State Street has been in the vanguard of this trend, acquiring Goldman Sachs Administration Services (GSAS) and Morgan Stanley Real Estate Investing’s (MSREI) fund servicing operations, both in 2012. State Street was recently one of the only SIFI (Systemically Important Financial Institution) banks to make another purchase, when its asset management division, State Street Global Advisers (SSGA), added $100 billion of assets through acquiring GE Asset Management in March 2016.
As a smaller number of top tier players are essentially now competing for the same giant institutional clients, State Street’s Executive Vice President and Global Head of Alternative Asset Managers Solutions, Maria Cantillon, does expect the wave of corporate combinations to slow down. Cantillon, who was selected for The Hedge Fund Journal and EY’s 50 Leading Women In Hedge Funds survey, therefore sees asset service providers shifting the focus to differentiating their offering – and State Street asserts that harnessing technology will be its defining quality.
“The technological revolution has already changed the financial landscape,” observes Cantillon, but at the same time she views Fintech as still in its infancy, pointing out that no Fintech bank has yet been created. Rather than resting on the laurels of its 224-year history, State Street is now setting its sights on a clear ambition: “we want to be a Fintech asset service,” says Cantillon. State Street is under no illusion about the magnitude of the challenge at hand and expects it will take years to transition systems, processes and mind-sets towards the desired objectives. The firm has initiated an ongoing programme of internal and external co-ordination and collaboration – with firms of all ages and sizes, and some universities – to make the most of the opportunities afforded by technological advance. State Street is perhaps majoring on technology as the firm has always developed its own systems and solutions in-house. State Street was an early mover on cloud, implementing a private cloud computing environment as early as 2011. State Street has started a five-year programme with high level goals that include centralising data; harnessing new technologies including blockchain; recruiting more scientifically trained staff and partnering with universities.
Centralising data management is now an overarching objective, “as this helps to make asset management businesses more scalable and increases their capacity,” Cantillon explains. To this end State Street launched Project Beacon, which is intended “to digitise the whole organisation in terms of how data is managed, used, exchanged and manipulated,” she goes on. Clients and State Street should view the same data through the same portals “to improve processes, client service and timeliness, as well as eliminate operational defects,” Cantillon adds. This should promote more automation, speed up processes, enhance accuracy and thereby free up managers’ time.
State Street’s Global Exchange (GX) division is designed to be the central repository for data that can be manipulated for multiple end uses – performance measurement, indices, benchmarks, analytics, research and risk management, across all asset classes. “GX harnesses and galvanizes the data so that we can embrace change, keep pace with the industry, and offer solutions,” underscores Cantillon. In keeping with the philosophy of “data-as-a-service”, State Street allows users to aggregate disparate data from multiple sources on a consistent basis. State Street can clean the data and warehouse it in a secure environment whereas some managers are still dependent on notoriously unstable, unreliable and error-prone Excel spreadsheets. State Street is also using machine-learning techniques based on manager preferences for sourcing information tailored to their needs.
Fostering new technology
To explore new technologies, in 2015 State Street created the Emerging Technologies Centre (ETC), where innovative engineers test-drive technological prototypes and change the organisation’s mind-set around technology. The mission is embodied in five principles that sound very much like a venture capital approach. “A portfolio approach to disruptive technology; creative idea generation; learning through experimentation; embracing external ideas; taking calculated risks and expecting creative and reasonable failures,” Cantillon enumerates. The ETC group illustrate the type of cultural change that State Street seeks. “ETC do everything that a custodian bank would not do, and they sit in Silicon Valley wearing jeans and T-shirts,” Cantillon explains. This entrepreneurial springboard for idea generation has been set in motion because “we need to think outside the box to effect change that can have an exponential effect on the business,” says Cantillon.
State Street has already applied its evolving data capabilities to many areas. Regulatory reporting is a service where State Street saw the potential both to add value to existing clients and reach out to new clients by offering the service on a standalone basis, to firms that did not have any other relationships with State Street. This made sense as, for managers using multiple asset servicers, it would be duplicative and wasteful for other asset servicers to reinvent the wheel of work State Street might already have done. State Street claims to have carried out a large proportion of the first batch of Form PF reports in 2013, and it now carries out the filing for the majority of its clients, but also aids non-clients. But Form PF was only the start. State Street’s routines for Form PF were intended to be repeatable, scalable and applicable to other reporting standards and formats, such as the CFTC’s Form CPO-PQR; Annex IV AIFMD, Liquidity Reportingand UCITS Risk Reporting in Europe; money market fund stress testing, and other types of reports such as MIFID and FATCA related ones as well as Asian regulatory reporting. State Street has a ‘follow the sun’ global team who have assisted managers with all types of regulator reports and Cantillon knows from experience that “no two managers are created equally”.
Regulatory reporting can have some overlap with risk aggregation, and here State Street offers a range of options. GX has proprietary analytics and can also use State Street’s proprietary truView to customise output formats with some interactive options. Users can drill down to position level data or dial up to aggregated, higher level, factor or other exposures. State Street gathers consistent data across all funds and managed accounts, sometimes obtaining data from other administrators. As with Form PF, State Street was an early mover on Open Protocol Enabling Risk Aggregation, where Cantillon claims “we have been one of the strongest contributors to the ongoing development of Open Protocol and are the largest producer of Open Protocol reports”.
State Street is not only opening-up flexibility to brainstorm internally, but also recognises that some of the best new ideas may only be conceived by completely new companies. The notion that industries can only be disrupted by outsiders seems to resonate well here. Hence State Street is supporting Fintech start-ups, such as Level 39, which resides on the 39th floor of One Canada Square in London’s Canary Wharf, and describes itself as “Europe’s largest technology accelerator space for finance, cyber-security, retail and smart-city technology companies”. State Street expects the entire industry to reap benefits that generate a virtuous circle of positive externalities. “Our shared goal is to advance enterprise-wide, scale-wide and industry-wide to revolutionise the banking industry,” is Cantillon’s vision and she further argues “private blockchain will not work so we need a public solution”.
Blockchain and automation
Blockchain is one example of new technology where State Street is taking a very different approach of pooling know-how with other industry behemoths rather than nurturing minnows. State Street was in September 2015 one of the first nine banks to join a consortium called R3 (R3CEV LLC). Since then a total of 45 (and growing) of the world’s biggest banks and technology companies have come on board and R3 is very much a global project with members from North America, South America, Europe, Asia and Australia. R3 is dedicated to another core State Street objective: using blockchain to automate manual processes. Cantillon sees strong potential for distributed ledgers to save time and money in areas including syndicated loans, bilateral instruments such as TRS (Total Return Swaps) and CDS (Credit Default Swaps), security lending, collateral management, settlements and ownership registries for hard assets such as real estate. R3 is busy trialling various potential solutions. “This is incredibly exciting as the industry has never embraced outsourcing these processes,” she enthuses. Additionally, “no technology hitherto has provided a holistic front to mid to back office solution,” according to Cantillon. The versatility of blockchain applications is such that they can touch every part of State Street’s multi-strategy asset manager clients, which pursue traditional, hedge fund, private equity and real estate strategies.
Notwithstanding the huge scope for automation, State Street still need to keep bringing in fresh talent to drive forward the Fintech vision. State Street likes to use specialists for each asset class and strategy and istherefore pursuing talent acquisition from multiple angles. Acquiring the administration units of Goldman Sachs and Morgan Stanley brought many specialists into the fold. For instance, MSREI brought 150 accounting, operations and technical staff into the firm. State Street has devised some distinctive recruitment approaches of its own. As well as those trained in finance and investment, State Street makes a point of hiring STEM (Science, Technology, Engineering and Mathematics) graduates and postgraduates.
The firm likes to recruit from a broad range of disciplines, including qualified fund accountants, CFA charterholders and CAIA charterholders. State Street encourages and supports employees to obtain a variety of qualifications and designations. In May 2016, State Street announced a partnership with the CFA Institute that has three objectives including talent development, which entails encouraging staff to pursue the Chartered Financial Analyst (CFA), Certificate in Investment Performance Measurement (CIPM) and Claritas professional designations.
State Street’s partnership with the CFA Institute also aims at thought leadership, and the first project in this collaboration will see State Street’s Centre for Applied Research joining forces with the CFA Institute to pursue a study into investor motivation. State Street’s latest academic tie-up, announced in 2015, is designed to help with both recruitment and research. A technology centre at University College Cork (UCC) in Ireland is part of a collaborative effort with Zhejiang University (ZJU) in China. The centre is dedicated to examining how emerging technologies will impact the financial services industry. Twenty students are researching areas including virtual crypto currencies and investor behaviour, and could join State Street when they graduate. State Street has a history of partnering with academic researchers over more than a decade, and has provided support for the Consortium For Data Analytics In Risk, at the University of California at Berkeley, for instance.
How are asset managers choosing asset servicers?
All of this comes against a backdrop of State Street broadening and deepening its client relationships – partly driven by its clients diversifying their own businesses – and heightening the need for technology in many facets of these companies. Of $28 trillion in assets under custody and administration in total, State Street has $1.2 trillion (as at 20 June 2016) assets under administration in alternatives spanning all asset classes, strategies, investment vehicle types and domiciles and Cantillon argues “we are an institutional investor’s bank”. In what seems to be a small world, State Street and their asset manager clients often seem to share the same end investor clients (such as pension funds and sovereign wealth funds), which means that both of the latter have done their own due diligence on State Street, including the AIMA DDQ for administrators.
“We view the CIO and Head of Distribution as two key actors as our industry develops and matures – and we are already servicing them,” explains Cantillon. “Client needs are changing and counterparty selection is becoming more focused. Managers are thinking more and more about what strategies they deploy, global footprint, product types, new investor types and what to outsource versus what to keep in-house”. Cantillon says that the role of Head of Distribution is now “a huge job with the need to explore new areas, new product types such as regulated products and new geographies and what’s the best way to get product to market”. Helping clients with their distribution strategy is key, be they regulated products or not and regardless of the jurisdiction. “We have seen large growth in European regulated products,” she adds. Regulated funds may need a depositary, or ‘depositary lite’, function, to access many EU markets, and State Street does both. Here Cantillon thinks some managers may underestimate the costs of entering the US market, which could be more than setting up a UCITS. Cantillon has also seen how the emergence of investors in Asia has helped some managers to diversify their investor bases. Cantillon has worked in Singapore and knows the importance of firms like State Street in aiding managers globalise their distribution. “We have done a huge amount of work on our investor services transfer agency platform, which is now linked to all of the major markets around the world, including Asia, the Americas and Europe,” she points out.
Custody, financing, and leverage
Though State Street has broadened out its offering, the bread and butter services of custody and cash management are still vital in garnering new clients. “Custody is a sunrise business not a sunset business,” stresses Cantillon, who has seen some custody component to all mandates won this year. An increasing proportion of clients are using State Street for both administration and custody. Funds that do not need leverage might prioritize custody services over a traditional prime brokerage model. Leverage can also be provided and the model here is that State Street takes a lien over assets on its custody platform rather than using them for re-hypothecation. State Street’s liability-driven business model distinguishes the bank from universal banks or prime brokers and investment banks.
State Street is investing in its alternatives capacities because the prize is compelling. State Street remains upbeat on the growth outlook for alternatives, and Cantillon sees “the search for diversification as driving alternatives growth now”. State Street expects alternative investment industry assets could grow from $10 trillion today to $18.1 trillion by 2019, according to the State Street Hedge Fund Survey conducted by Citigate Dewe Rogerson in 2014. Some industry reports also suggest liquid alternatives will more than double from $817 billon now to $1.7 trillion by 2019, according to eVestment Administrator Survey 2015. State Street expects sovereign wealth funds, particularly in Asia Pacific and the Middle East, and emerging markets, to be key growth drivers, which adds to the rationale for State Street’s growing global presence.