State Street Global Services looks to the future
State Street Global Services: Best ETF Custody Provider & Best ETF Fund Administrator – Frank Koudelka (pictured), Senior Vice President – ETF Product Specialist at State Street Global Services, explains that globally the firm looks after 62 per cent of ETF assets, while in the US, from an administration point of view, they have close to 60 per cent of assets under management and 70 per cent in custody.
“We pride ourselves in being consultative with our clients,” Koudelka says. “It’s a global offering so if a client is looking to bring ETFs around the globe, we are the only ETF provider that has a global platform allowing clients to scale out without having to select multiple service providers and different models of working.”
State Street Global Services has been building its ETF business since the first ETF in 1993. “Our scale allows clients to execute best practice because we have seen it all in the ETF industry and we bring that knowledge to bear when a new client is launching with us.
“We can see where they should be concentrating their resources and where State Street can step in so there is not a duplication of efforts. This allows clients to focus on their investment strategy, sales and distribution and capital markets, while we work on the rest. This leads to more and more clients wanting to consolidate their business at State Street.”
Koudelka observes that the ETF industry has been going through both global changes and changes in the US.
“The global regulatory environment continues to be more and more friendly to the ETF investment wrapper,” he says. “The European continent has seen MiFID II with provisions that are friendly to the ETFs.”
Europe, Koudelka points out, has a deeply fragmented market with 28 different exchanges and fragmented approaches to depositories and settlement schemes which means that ETF liquidity is more fragmented.
“MiFID II’s requirement for centralised reporting of on and off exchange liquidity means that advisers can see true liquidity which is a very attractive feature of MiFID II.”
MiFID II has also led to greater fee transparency as it is designed to drive investors to lower cost instruments. “ETFs are transparent with no embedded fees or platform fees, you just pay the management fee,” Koudelka says. “The nature of ETFs is that you don’t have the additional fees so they are a more cost-effective product for advisers and end investors to build into their portfolios.”
Other domiciles, such as Canada with its Client Relationship Model II regulatory change, also included provisions around advisers, ensuring they were displaying to clients all fees and costs of their investments.
“ETFs are favourable in that regard,” Koudelka says. “As ETFs have no hidden fees and are generally structured with a management fee that allows more transparency to advisers and end investors.”
The US has recently seen its own regulatory change which effects the ETF industry, with the SEC’s introduction of the ETF rule – or 6c-11 – which simplifies the ability of asset managers to launch ETFs in the country. “It also codifies the exemptive relief process so that it is much quicker to bring products to market, especially for new providers,” Koudelka says.
Portfolio management becomes more flexible, he says, with all managers being able to employ custom baskets.
“We also have continued growth in the ETF marketplace in the US with semi-transparent active ETFs approved, which allow an active manager to launch a product without having to show their portfolio on a daily basis,” Koudelka says. “This means managers can hide their intellectual property and bring products to market in an ETF wrapper. They can display their holdings just as they would within a mutual fund. All we have to do is look north of the border to Canada to see the potential. The Canadian ETF market has over 20 per cent of its assets and over 50 per cent of the year to date flows in actively-managed portfolios. Disclosure requirements for ETFs are the same as mutual funds in this market”, says Koudelka.
“We’ve also seeing regulatory change favourable to ETFs across Asia-Pacific. Hong Kong recently approved actively-managed ETFs as a share class of a mutual fund and Australia has seen tremendous growth as a result of FOFA implemented several years ago.”
Regulatory change is encouraging and accelerating ETF growth across the board, Koudelka says. “Fixed income has been the asset class of the year for ETFs with more and more adoption of fixed income portfolios within an ETF wrapper.”
Until now, 60 to 75 per cent of ETF assets have been in equities, from an assets under management standpoint, but this year has seen fixed income flows that might exceed equities, Koudelka says. “Fixed income was always under represented in the ETF industry in the past.”
He comments that from the State Street standpoint, the firm has always had a philosophy of a three-year technology road map, building to support emerging trends.
“Semi-transparent active will be a trend around the globe,” he predicts. “We are building our technology to make them successful. We also believe that cryptocurrencies and blockchain will be important, so we are building out our technology to ensure that it can handle everything from tokenised and digitised ETFs to give our clients the assurance that we are building for the future in our operating model.”
Koudelka believes that its product and technology focus is a part of the State Street growth story as well. “When we show a potential new client what we have allocated in resources and capital for the future they can see we are forward looking, not backward looking,” he says.
Senior Vice President, Global ETF Product Specialist,
State Street Global Services
Frank Koudelka is the Global ETF Product Specialist at State Street. In this role, he establishes the strategic direction for ETF servicing, assists with the on-boarding of new ETF issuers, acts as senior relationship executive for all ETF clients and drives the product and technology strategy for ETFs serviced at State Street. Frank has 33 years of experience in the financial services industry and is an active participant on ETF industry committees and speaker at industry forums.