crisis as catalyst investment operations lessons from covid-19 · global head of executive...
TRANSCRIPT
After one of the most harrowing first
quarters in market history, institutional
investors around the world are taking
stock of what the pandemic-induced
upheaval in operations and markets
means for their future. For State Street’s
Chief Operating Officer Lou Maiuri, Global
Markets Head Nadine Chakar, and Global
Services Head Andrew Erickson, the crisis
has reinforced the pressure on asset
managers and asset owners to
re-engineer their operating models and
redefine their relationships with service
providers like State Street. In a recent
roundtable, Patricia Hudson, State Street’s
Global Head of Executive Communications
and Thought Leadership asked what the
most important operational lessons have
been for investors coming out of the first
phase of the COVID-19 crisis.
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Patricia HudsonGlobal Head of Executive Communications
and Thought Leadership
Lou MaiuriChief Operating Officer
Andrew EricksonHead of Global Services
Nadine ChakarHead of Global Markets
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Resetting Operating Models
Patricia: In what ways is the crisis
a catalyst for asset managers and
asset owners when it comes to how
they operate?
Lou: Even before the crisis, our
clients were under pressure as the
combination of fee compression and
rising costs forced them to rethink
the economics of their business models.
The pandemic obviously added another
layer of existential urgency in the form
of unprecedented challenges to
operational resiliency and revealed
some deep vulnerabilities. This was not
just in terms of moving all employees
to working from home in a matter of
days, although that was a massive feat,
but also in terms of how to continue
to transact and manage liquidity in
the face of historic market volatility
and uncertainty. I think their operating
models will now change forever.
When we mapped out our vision for
State Street AlphaSM, the front-to-back
servicing platform, we said the future
of asset management will be about
three things: 1) creating incremental
alpha or accessing beta efficiently;
2) managing risk; and 3) and distributing
investment capabilities. Those are
the core areas that every investment
management CEO must focus on.
Everything else to do with trading,
technology, operations and reporting
is up for debate over whether it really
makes sense to keep those in house,
or is it better to partner with a provider
like State Street to move those
operations onto a full front-to-back
servicing platform that can grow with
a client’s needs, provide better data
insights and incorporate all of their
existing applications.
While none of us expected or wished
for this global health crisis, the pandemic
has provided a real-time case study of
how State Street can deliver the global
scale, technology and operational
resiliency to support investors during
this most difficult period. We’re by no
means through this crisis, and even
after we are able to stabilize health
concerns, asset managers and asset
owners will still be confronted by very
difficult economic realities. I think
that will prompt many more C-suite
executives to contemplate a new
business model and a new partnership
with providers like State Street.
“ The pandemic has provided a real-time case study of how State Street can deliver the global scale, technology and operational resiliency to support investors during this most difficult period.”
Lou Maiuri
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Redefining Relationships
Andrew: I agree that the crisis has
reinforced a new way of working for both
us and our clients, and that has created
a new kind of partnership. No one had
a roadmap for moving into lockdown
around the world, let alone dealing with
a sudden doubling of transaction volumes
with all of their employees working
from home.
Those new realities forced two important
improvements: over communicating with
clients and providing far more transparency
into the services we provide for them.
Before the crisis hit, clients had not really
worked out the details of the entire supply
chain of their operations, so the initial
days of the crisis were about providing
greater transparency around that and
identifying areas where we could do
things for clients that they were no longer
able to do themselves under the new
circumstances. That really underscored
how we could become an extension of
their teams.
Patricia: What are some examples
of that?
Andrew: The crisis inserted a greater
degree of urgency for clients in turning
nice-to-have projects for the future into
must-have-now projects. For example,
extending a credit facility that originally
existed for just a few products across
the entire project range or expanding
the facility to deal with the huge rise in
volumes and market turmoil. There were
other situations in which clients realized
they couldn’t handle certain processes
from remote locations and asked us to
take those on for them. There are many
examples of hand-offs that will likely
continue post crisis.
Another major improvement was in
the area of fund pricing. Previously
clients would double check the pricing
we provided to them internally, but as
market volatility spiked, they could no
longer handle the jump in volume.
Instead, we took the time to walk them
through our process so that they had
better line of sight into how we calculated
pricing and where we were in the process
at any point in time. Gradually our team
and the client’s team felt that they were
working together rather than two separate
teams checking each other’s work. That is
another area of collaboration that is likely
to continue after the crisis because it is
a much more efficient use of resources.
“ The initial days of the crisis were about identifying areas where we could do things for clients that they were no longer able to do themselves under the new circumstances. That really underscored how we could become an extension of their teams.”
Andrew Erickson
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So the crisis revealed a number
of pain points for clients that we
successfully took off their hands
and are now being asked to
operationalize for them. We’ve also
identified a number of customized
processes for clients that are highly
people-intensive and were revealed
to be sources of risk during the crisis,
so we are now having discussions
around how we work together to
make those processes more robust
through automation.
Clients saw firsthand how we were
able to deal with adversity and
unknowns because we have really
good people who know how these
processes work on a very deep,
technical level. They also saw our
global operational scale at work,
which was flexible enough for us to
be able to move different functions
to different teams, literally within
a day, and then change things up
again two weeks later. The crisis
gave clients an important window
into that operational resiliency and
the innovative ways we would find
to get things done.
Lou: That is an important point.
On a daily basis we were confronted
with new operational challenges for
which, as Andrew said, there was no
playbook. Instead we had to rely on
the ingenuity of our teams to create
effective work-arounds and process
improvements. We know clients valued
that dedication and can-do spirit based
on the notes of thanks they sent us. So
the reputational dividend from the great
work our teams have accomplished will
help deepen collaboration for the
duration of the crisis and beyond.
“ Clients saw firsthand how we were able to deal with adversity and unknowns because we have really good people who know how these processes work on a very deep, technical level.”
Andrew Erickson
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Execution and Liquidity When Clients Need It Most
Patricia: Nadine, Global Markets was
on the front lines of the market volatility
in March, helping clients to continue
to transact and access liquidity when
they needed it most. The daily volumes
were at all-time highs in some cases.
How was your team able to cope and
how do you think that experience will
affect the trend toward outsourcing?
Nadine: As Andrew suggested,
the crisis provided a case study in
how well outsourcing can work, even
at, or perhaps especially at, the most
difficult and volatile times in the market.
That first volatile quarter has helped
solidify the thought process that when
you outsource trading you are still only
a phone call or computer screen away
from monitoring the execution of
your strategies.
In terms of how well we executed,
preparation was two-thirds of the battle.
We had robust controls and processes
in place, all supported by a strong
technology backbone that we had
invested in over a number of years.
While no one expected a global
pandemic, our substantial Asian
footprint meant we had a head start
in January tracking what was coming.
So we moved our teams into our Disaster
Recovery sites early in the year and split
the staff to ensure that if one site was
impacted we could continue to operate
from another one. We were also able
to leverage new technologies to allow
people to trade safely from home,
although we still have a fair number
of traders in the office, where we have
instituted strict social distancing and
other safety protocols.
There were four other essential
elements that helped us be successful.
Perhaps the most important of those
is that we always considered ourselves
to be our clients’ essential partner.
We are a relationship bank, not a
transaction bank, so we went above
and beyond to help clients transact
and manage their liquidity, working
with clients on a case-by-case basis.
In cases where clients had liquidity
challenges, whether it was in FX trading
or securities financing, we came up with
creative ways of helping them bridge
any shortfalls so that they didn’t have
to sell their assets at fire-sale prices.
“ That first volatile quarter has helped solidify the thought process that when you outsource trading you are still only a phone call or computer screen away from monitoring the execution of your strategies.”
Nadine Chakar
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Our background as an asset servicer
means we know the technical side of
the settlement process very well and
can help our clients navigate the
choppiest markets.
We focused on client flows and made
sure that anyone who needed to trade
was able to trade with good pricing and
global coverage, 24/7. It was interesting
to see how important personal
relationships became again in this
crisis, similar to 2008. At the worst
of the volatility, our clients actually
stopped trading electronically and
reverted back to picking up the phone
to trade bigger blocks with us directly,
knowing we were handling the crisis as
their partner and as a problem-solver
focused on best execution and best
pricing. We actually gained market
share during the crisis as investors
turned to us from other banks that
were either quoting very wide spreads
or were just not quoting at all. As Lou
said, serving our clients with integrity
during hard times is a reputational
benefit that yields multiple dividends.
Stepping up the flow of market insights
to clients was also important, with daily
commentaries and regular calls with our
economists and strategists. A fourth
component was the quality of
the operational support we provided.
Despite historically high volumes and
the fact that our teams were scattered
across many sites, we were able to
settle trades and move funding in
a way that made clients feel they
were experiencing a normal trading
day. Finally, the investments we had
made in infrastructure over the last
few years really paid off, as our FX
Connect platform was able to cope
with record volumes at a time when
other platforms could not, which
meant in some cases we moved
from being the secondary provider
to the primary provider.
Lou: Nadine’s right that we did have
a head start because of our experience
in moving our 3,000 employees in
Hangzhou to working from home in
the course of a week during January,
so we entered crisis mode early on.
Moreover, in another large market like
India, we had already invested in
equipment so every employee had
a laptop and a virtual desktop, which
made moving to work from home,
again in a matter of days, much easier
for us than for other financial services
companies with large operations in India.
“ The goodwill we have generated with clients will last long after we return to some semblance of normality. We will see a further acceleration of automation, a heightened focus on virtual infrastructure and a greater appetite for outsourcing investment operations.”
Nadine Chakar
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Supporting Global Capital Markets
Patricia: Like many other companies,
State Street put the health and safety
of its employees first as it continued
to deliver service excellence to clients.
But how did we also support the health
and safety of financial markets?
Lou: The pandemic underscored in
a very dramatic way how interconnected
we all are on many fronts. Obviously
medical professionals and first
responders were on the front lines
of protecting public health as COVID-19
spread. But State Street was also on
the front lines of protecting the health
of global capital markets as we moved
cash and provided daily pricing for funds.
Because of our size, global reach and
central role in market infrastructure,
we were in daily communication with
policymakers and regulators as
the stress on financial markets grew.
We played a critical part in helping
the Federal Reserve launch its first
liquidity facility for money market
funds, literally within 24 hours, even
before the Fed itself was operationally
ready, and we are involved in most of
the other Fed facilities that have since
been created. As veterans of the 2008
financial crisis, all of us recognized
the need for speed when it came to
maintaining investor confidence, and
the regulators behaved superbly.
We also intervened with regulators
on behalf of other custody banks when
India was shutting down and some of our
peers were not as well prepared. Again,
we understood the interconnectedness
of the system and that we were only as
strong as the weakest link in the chain.
Our ability to clear and settle trades for
our clients would be jeopardized if other
custody banks were at risk. So while our
core purpose is to help achieve better
outcomes for the world’s investors and
the people they serve, part of that
mission is supporting the overall health
of the financial system by providing
leadership and counsel when and where
it is needed.
“ While our core purpose is to help achieve better outcomes for the world’s investors and the people they serve, part of that mission is supporting the overall health of the financial system by providing leadership and counsel when and where it is needed.”
Lou Maiuri
9
Lessons for the Future
Patricia: What are the abiding lessons
from this first phase of the crisis?
Andrew: In many ways the crisis
provided a strong test case for the
validity of State Street’s business
strategy: clients really did seek an
essential partner with a resilient
servicing platform that could support
their operations from start to finish
with the global scale and technology
strength that such extraordinary
conditions required. And with so much
at stake, clients wanted to be working
with high-performing State Street
teams who brought grit, determination
and ingenuity to a rapidly changing
set of circumstances.
So I think one of the lasting lessons
for our clients is that State Street has
transformed its engagement model
and value proposition for clients.
We are much easier to deal with now
that we have the Global Client Division
to provide that central point of contact
and accountability and have reduced
a lot of our internal bureaucracy.
It was very telling and encouraging
to see how well State Street teams
operated across business functions
and geographies as former silos were
overcome. We saw how effectively we
could operate for our clients when we
brought the full power of the global
enterprise to bear as One State Street.
Now that the crisis has given clients
better line of sight into our processes
and people, and we have been working
as an extension of their teams, we have
laid the groundwork for more strategic
conversations around how we can
pro-actively improve their operating
model on multiple levels. That means
ensuring our risk teams are speaking to
their risk teams, our compliance teams
are speaking to their compliance teams.
That is how we will transform transactional
relationships into strategic partnerships.
I also think many clients will reconsider
the wisdom of having multiple providers.
The conventional view used to be that
having multiple providers diversified your
operational risk, but the crisis showed
that multiple providers can often multiply
your risks, especially if those include
providers unable to bring the necessary
operational resiliency required during
times of market stress. So I would not be
surprised if more clients want to be more
fully integrated with us so that they have
one provider that they really understand
and are joined at the hip.
“ Now that the crisis has given clients better line of sight into our processes and people, and we have been working as an extension of their teams, we have laid the groundwork for more strategic conversations around how we can pro-actively improve their operating model on multiple levels.”
Andrew Erickson
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Nadine: The most important lesson is
that we were there for clients when it
mattered most. We were there to make
markets in foreign exchange, to provide
liquidity and financing. We helped them
when they needed to deleverage and
raise cash. We put their interests first
and provided fair pricing. It’s one thing
to read in Euromoney magazine that
State Street is the number-one provider
to real money managers; it’s completely
different to experience that first hand
in a crisis. So I believe the goodwill
we have generated with clients will
last long after we return to some
semblance of normality. We will see
a further acceleration of automation,
a heightened focus on virtual
infrastructure and a greater appetite
for outsourcing investment operations.
Lou: I agree that clients saw a new side
of State Street during the crisis, one that
was more nimble, resilient, responsive
and could offer a far wider range of
support and more creative ways to solve
problems. As I said at the outset, we will
see a resetting of operating models,
maybe not immediately, but the crisis
has intensified all of the economic drivers
that will force investment management
firms to change. Our Alpha platform is
designed to deal with those new realities.
If you’re an investment manager
trying to move into a different asset
class or grow in a different region, you
traditionally needed huge infrastructure
investments to do that: technology,
people, etc. Now you can access all of
that through our platform: bank loans
and other credit products, FX products,
in any region in the world. We provide
the operations and servicing
infrastructure, so investment managers
can focus on the investment performance,
risk management and distribution that
matters most to their business.
I also think there will be lasting
interest in the advantages of working
with a GSIFI (globally systemically
important financial institutions) like
State Street because we were made
more resilient through the post-2008
capital cushions, liquidity structures,
controls and oversight. Our balance sheet
was able to absorb nearly $100 billion
more in deposits in a flight-to-safety
moment that the market needed. In
a post-pandemic world, operational
resiliency and efficiency will be a priority
for institutional investors and State
Street has demonstrated that we are
especially well suited to provide that.
“ The crisis has intensified all of the economic drivers that will force investment management firms to change. Our Alpha platform is designed to deal with those new realities.”
Lou Maiuri
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For more of our executive insights on the impacts of the pandemic, read our Crisis as Catalyst series and visit statestreet.com/ideas.