Foreign exchange: State Street FX bounces back
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Foreign exchange: State Street FX bounces back

Bank regains market share; Benefits arise from bespoke research

Last year’s Euromoney FX survey, in which State Street’s global ranking with real-money investors slumped from seventh to 15th, was an aberration, according to Guy Kirby, global head of FX sales at the custodian bank.

So the result in this year’s survey, in which State Street’s position improved six places to ninth with real-money investors and climbed five places to 17th overall, puts it back in its rightful position.

"We did not see a commensurate fall in our market share in 2011," says Kirby. "Our analysis of our marketplace was that we were still seeing the same or a larger share of our clients’ business as in previous years."

At the time, the consensus view in explaining the slump in State Street’s market position was the slew of lawsuits it and other custodian banks were facing in the US.

Indeed, its market-share decline in the US had been even more pronounced, falling from third place to 13th with real-money investors. That has partially recovered this year, rising two places to 11th.

Meanwhile, in Europe, it picked up three places to 11th with the same client base.

State Street v. BNY Mellon
Real money market share, 2010 to 2012
Source: EuromoneyMarketData

Kirby is keen to point out that much of its business these days is not driven by its custodian services. Indeed, he says, the mix is about 50/50 between custodian and non-custodian clients, and adds that any public perception that its FX volumes are driven off its custody business is incorrect. "We’ve been significantly growing our FX business with investment managers for many years," he says. "In fact, we trade with as many funds held in custody at other banks as we do for funds under custody at State Street. We’re happy to do FX business regardless of where the assets are custodied."

That said, the bank remains focused on servicing institutional investors, with an offering that Kirby believes cannot be matched by its rivals, whether that be the larger flow banks or the trust banks that State Street is often loosely grouped among.

"We have been growing faster than our competitors, and it’s interesting to note how people compare us," he says. "Some people only compare us to other trust banks. I have not seen other US trust banks in the top 10 with real money in the survey. That suggests we’re doing something different."

Guy Kirby, global head of FX sales at State Street
Guy Kirby, global head of FX sales at State Street

This unique selling point is based on a few factors. For the past decade, State Street has been following what Kirby calls "a discreet research agenda", where it has partnered with leading academics throughout the world, and takes financial theory from academia and applies it to practical situations. For instance, it comes up with daily measures of market turbulence, which model break-downs in correlations as well as the more conventional measures of implied and realized volatility.

More recently, State Street has made available to its clients daily measures of inflation by partnering with the firm PriceStats. It was a concept that was developed at the Massachusetts Institute of Technology, called the Billion Prices Project, which developed software to collect prices from online retailers, and now monitors price fluctuations on about 5 million items on the internet in 70 countries.

"The power of this tool is the power to catch turns and to determine trends," says Kirby. He cites the example of measures of inflation today that suggest inflation is more stubborn in the UK and Germany than official levels state.

All in all, Kirby believes his firm has a compelling offering that will allow it to grow its market share, beyond just real-money investors.

Add to that, in the most recent round of bank stress tests conducted by the Federal Reserve, State Street came out as one of the strongest of the US banks.

Kirby says: "Why wouldn’t you, if you were sitting in a hedge fund, want daily measures of turbulence and inflation? If you believed you were getting the price you wanted, and you were getting service, and you were getting a globally integrated sales force, why wouldn’t you want to trade with an entity such as State Street – especially if that entity also has the strongest tier 1 common capital ratio compared with the other 18 participating banks in the Federal Reserve’s 2012 stress test?"

Indeed, the firm seems to have got some traction with leveraged funds in this year’s survey. It rose seven places to 18th. This is largely attributable to changes in the structure of this year’s survey, which increased the collection of volumes from clients’ top-20 counterparties.

Even though State Street might wish to expand beyond the tarnished custodian FX model of recent years, there are some positive attributes of the model that might stand it in good stead and allow it to service its clients well when mandated clearing is implemented beyond 2012.

"State Street is extremely well positioned in this marketplace to talk about how you clear products, how you settle products, how you confirm products," says Kirby. "That historically has been one of State Street’s real expertise areas, so I feel comfortable that State Street will have answers to those sorts of questions."

This story first appeared on euromoneyfxnews

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