It has been 18 months since Jeff Conway returned to the UK after a decade in his native US and is now firmly settled into his role of CEO of EMEA, with regional responsibility for the Global Services, Global Markets and Global Exchange businesses.
He has brought back a zeal for technology and is leading a root-and-branch overhaul of business processes. Europe has not, in the meantime, had a stellar year. Brexit and market turbulence have only added to the daunting prospect of complying with an unceasing barrage of compliance demands.
“Our clients need us now more than they ever have. We need to be relentless in our ability to deliver for them.”
To “relentlessly deliver” is a phrase that Conway repeats during the interview, describing the need for his business to support clients in increasingly challenging times. Testing for sure, but also circumstances where the best prepared can pull out an advantage.
Not every industry trend or regulatory change will benefit State Street but Conway takes the view that there is now no point fighting the inevitable and effort is best spent getting ahead of the curve.
“Just accept it – regulation is not going to go away. We have our own regulatory requirements but our clients have their own and we need to help them. I looked at the level of demand that our customers were looking to from us – and it continues to be quite high.”
There is an array of possible strategic directions for the truly global custodian banks. Primarily due to regulation, there are unresolved questions of what is required of trust banks, new opportunities left by investment banks curtailed by capital constraints and areas where clients need additional support.
“Where there is confusion, there are real opportunities,” he says. “On the back of market change there is opportunity for us to introduce a new set of capabilities. Our ability to position the organisation while remaining nimble enough in areas of change is going to put us in a good place.”
For example, State Street’s enhanced custody product was launched as a result of regulatory constraints hitting prime brokers. Enhanced custody, run by Alex Lawton’s team for EMEA from London, provides short supply to the market alongside (rather than competing with) prime brokers, many of which are constrained by Basel III and would perhaps rather concentrate on activities attracting less capital cost and greater revenue.
Waiting for certainty before starting the development process would mean products would not be ready when clients’ needs arise.
“We are going to have to take some bets – for lack of a better word – in advancing new innovative solutions. It isn’t always going to be a clear path. But if we are smart about how the regulatory environment is driving the market then we can take some new product bets.”
The complexity and frequency of regulatory reporting requirements has stoked demand for powerful data solutions. State Street is certainly not alone creating products to streamline vast amounts of data but Conway says that State Street Global Exchange is “doubling-down” on its solution.
DataGX platform, which is already operational for Solvency II and EMIR, has the potential for far broader application. “I said, let’s look this a little bit differently. Let’s invest more, be forward looking. Let’s make sure we have the resources not just for today’s demand but build this out into a broader platform for the demands we think are coming.”
State Street has already signed up clients to DataGX, which allows them to internalise and consume a variety of data, including from other custodians.
“It is the leaping-off point for us offering a broader range of data-analytic solutions within Global Exchange. If I can solve my client’s data aggregation challenges – and do that as an extension of our current services relationship– there will be tremendous opportunities to innovate into new spaces alongside our clients.”
It is a strategy that could harness many market trends. For example, the move towards multi-asset class vehicles means liquidity monitoring is becoming a critical function. Indeed, the US SEC is looking into liquidity management around subscriptions and redemptions.
Says Conway: “If you consider complex investment strategies with subscriptions and redemptions coming in every day – what scenarios could impact the liquidity position of the fund?”
Likewise, the trend for large pension funds to insource investment management requires support. “Providing the infrastructure required for them to be able to take on these activities, and to help with the transition, increases the impact that we can have on those clients. There’s a level of innovation happening across the franchise that gets us much more deeply into outsourced-CIO services.”
Conversely, asset managers are looking to outsource non-core functions and face their own regulatory issues. “They want less of the infrastructure in house and to leverage organisations such as ours. Changing their operating model to support new investment strategies while complying with new regulation is a heavy lift.”
State Street’s digitisation efforts are guided by Beacon, a five year internal transformation programme launched this year. “It is about looking at things process-by-process, automating and digitising our core operating model and integrating those benefits into the end-to-end operating model with our client.”
In January 2016, State Street predicted that Beacon would generate substantial ongoing savings including $75m during the year and $550m over the next five years (although there are large implementation costs). Its transformative focus moves across businesses but the theory is the same; first it rationalises overlapping applications and processes and then optimises the workforce – moving jobs to lower-cost locations and “less hands-on work” – before identifying new product opportunities.
In the context of DataGX, it meant rationalising processes and constructing a platform that allows the automated consumption of trade data. For example, it banishes the practice of collating trades into an NAV and sending end-of-day reports to clients.
“In the new environment, we get our trades in a straight-through automated fashion. Our clients have visibility into its production cycle as we configure the NAV.” Ultimately, this will allow State Street to provide real-time data delivery. “We’re not fully there yet, but the clients already get a cleaner set of data and more rapid delivery to their shop.”
A focus on efficiency inevitably means changes to the workforce: “Beacon ultimately creates new growth opportunities and will allow our workforce to develop other skill sets versus openly pushing on reductions. Organisations have to push to create a cost advantage and part of that is automation. No question.”
While he could not be accused of being overly sentimental, Conway has a very positive perspective. “What makes a winning formula is creating a cost advantage while fuelling new product capabilities. It requires a real process engineering mindset, changing your core operating model, overlaying technology, to drive out manual intervention.”
Rise of the tech guys
Automation and digitisation have increased the importance of technology experts. As Global Investor/ISF reported frequently during 2016, there has been a steady flow of senior industry figures to technology start-ups to guide systems development.
“Continuing to deepen our technology resources and attract new perspectives and skills remain a priority. Beacon reinforces the opportunity and challenge related to changes to our business model and developments required in defining the workforce of the future.”
While maintaining existing business lines will require less manpower, it does not mean the total workforce will decrease. “Our digitisation effort is clearly about creating greater efficiencies in our core operating model but more importantly, it’s about growth. If the digitisation effort creates new product potential, the workforce needs to introduce new skills and talent.”
Already, there been a noticeable change in the type of person being hired to people with deep data analysis skills. “You need core technology developers, but also a hybrid people that can do data mapping, analyse core data sets or build new analytic models on top of data sets.”
He says technology has become a core, revenue-generating part of the business. “It is an exciting prospect for people starting out in the industry.”
While last year’s industry buzz-word ‘data lake’ resulted in the DataGX product, the current “cool things” State Street is working on with various partners involve robotics and trading. “Part of what we’re doing is creating regulatory solutions for EMIR, MiFID or KYC.
But at the forefront is what we’re doing around cognitive learning. And we are doing some really cool things around unstructured data.” State Street has a tie-up with Media Stats that enables it to create signals for predictive analytics. Progress is at a very early stage but is “advancing at a reasonable rate” and should lead to robo-learning capabilities.
Right now, its research teams can furnish clients more predictive analytics and “it’s a space that we’re continuing to push and advance”. For example, its risk analytics tool can be used to identify opportunities that emerge as a result of interaction between seemingly unconnected markets. While these tools remain mostly of use to chief risk officers they will become increasingly useful to portfolio managers as the tools approach real-time.
“We have to invest in the future – and we certainly are. We recognise that the industry is changing and we need to change at a more rapid rate than ever.”
You can be sure Conway will be relentless in facing the challenge: “You can never have an end game.”