State Street likely to acquire more custody and fund-admin businesses

Joseph ‘Jay’ Hooley has been chief executive of State Street Corporation since March 1 this year and president since April 2008. He was named chief operating officer in April 2008, before which he had been an executive vice president since 2000. Hooley joined State Street in 1986, and before that he worked at companies including telecoms firm AT&T and International Financial Data Services.

How will the new US financial reforms signed in mid-July affect the asset-servicing business?
It looks like a broad set of new rules and regulations to make the industry more responsible and less likely to go through a repeat of what it went through the last couple of years.

It’s a 2,300-page document, so we’re still going through it. But there isn’t anything I’ve seen so far that would materially affect what we’re doing or would like to do on the asset-servicing or asset-management side. In fact, I could argue there are some opportunities that are created through it.

For example, one way we create more safety and soundness in financial markets is by using independent intermediaries, such as clearing houses or exchanges, to create more transparency. And one of the things embedded in the legislation is that a certain proportion of derivatives trades will have to be centrally cleared and traded on exchanges or via electronic trading platforms.We look at that as a potential opportunity, as we’re a processing bank by nature – clearing is basically what we do – and we also have a significant electronic trading business.

How about on the fund-administration side?
If you think of the aftermath of the [Bernie] Madoff [fraud] issues around hedge funds and transparency, many markets around the world require hedge funds to register now. One of our fastest growing businesses is administration for hedge funds. I’ve spoken to some big and very sophisticated hedge funds, and it’s not necessarily that they want to do it, but their customers are saying ‘I want to make sure my assets and segregated and independently held’.

So these moves towards increased transparency and visibility – not only of record-keeping but safe-keeping of assets – really play to our strengths.

Fund administration for alternatives has been the area that’s been most internalised up to now, but outsourcing is growing rapidly. We’re the global leader in that business with $610 billion in assets under administration. In March 2005, we had about $100 billion in alternative assets under administration.

For example, Caxton Associates – a very sophisticated, competent hedge fund – decided to outsource all that work to us last year in June. Most of the hedge-fund administration business we’re adding is coming from in-house [as opposed to from new funds or switching from other fund-admin providers].

You’ve made acquisitions in the fund-admin area recently, I believe?
Yes, we made two acquisitions in the second quarter, one being Mourant [a fund administration company based in the Channel Islands with a footprint in Asia] and the other was Intesa SanPaolo Securities Services in Italy. Those deals gave us a market-leading presence in Italy as well as more capabilities in real-estate administration. We now cover the hedge-fund, private-equity and real-estate space pretty thoroughly across the globe.

Do you see more acquisitions of that sort in future?
Yes. The trust and custody business has consolidated over the last 10 years, yet there are still quite a few trust and custody businesses within big banks that are sub-scale and don’t have a global footprint. As you see banks continuing to come under pressure to raise capital and increase their capital ratios, they’re going to look at selling assets that are non-core. And that will happen both in custody and alternatives administration.

The game today – whether it’s asset management or asset servicing even more prominently – is played globally. We’re in 25 markets, we have $19 trillion in assets we administer, and we’re pretty disciplined about investing in common systems, so the scale advantage of that is huge.

We view Asia as a destination in itself, but also a bridge to the rest of the world. And increasingly, as markets are global and there’s more rotation of assets around the world, Asia represents an opportunity for our North American customers to distribute products into Asia, and they know we will be there. It’s also an opportunity for our Asian customers to invest outside their borders.

So scale and global footprint are very important, particularly for our bigger customers.

Let’s talk about the Volcker Rule under the US reforms. An exception that’s been included means banks will be allowed to invest up to 3% of their tier-one capital in alternative investments. This is quite a big benefit for State Street, presumably?
We were a proponent of the alteration of the initial plan. In the US, there was a concern by the regulators about using bank capital to invest in what were perceived to be risky propositions. The argument was successfully made to the legislators that being in the hedge fund and private-equity businesses often requires seed money, and 3% was deemed a sufficient level of investment so that you could continue to seed hedge funds and private-equity funds We think that’s more than ample for us to be competitive as a manager of alternative funds. [Editor’s note: The change does not specifically limit the 3% to be used only for seeding.]

To what extent will you use that 3% to seed hedge funds?
It’s hard to say at this point, but it feels like a sufficient threshold. And from the standpoint of our asset-management business, post-crisis it feels as if a lot of our institutional clients are increasingly looking at what’s often referred to the bar-bell approach, where they have a number of beta strategies largely driven by quantitative passive strategies to cover the beta of a market, and the alpha comes from the alternatives. Given the trend we see, we didn’t want to be prohibited from having a full slate of alternative products to offer.

How much in terms of AUM did State Street typically have in alternatives prior to the crisis?
A pretty small amount. Our interest in the legislation was more about keeping our upside options open. It is also reflective of our opinion that managing money for others is not a bad thing for a bank to do, as long as you don’t expose the bank to significant risk of loss.

Some suggested the 3% alteration was made as a special-interest change because of Scott Brown's and Barney Frank’s links to Massachusetts. Do you have any comment on that?
It’s true that two of the key legislators involved in the legislation came from Massachusetts, where State Street is headquartered. Barney Frank was the chair of the congressional financial services committee and Scott Brown was the senator who took Senator Kennedy’s seat.

But I think the regulators and legislators would generally agree that the source of the problems in the financial markets really wasn’t around the trust and custody or asset-management businesses. So we did spend time with legislators to make sure that they understood our business. While we were supportive of regulatory reform in general, we wanted to ensure we could continue to operate on a level playing field, and not be hit with unintended consequences.

In the end, we think the result was pretty balanced, helping ensure the industry is more safe and sound, and setting up a game plan for dealing with any future crises.