(Pictured: Francesco Squillacioti)
State Street is introducing “enhanced custody” to Asia Pacific following increasing demand for the service in the US and, more recently, Europe. Enhanced custody offers securities financing directly to clients, without the need for a prime broker, together with traditional asset servicing and custodial services.
According to Francesco Squillacioti, State Street senior managing director for securities finance and Asia Pacific regional business director, the product is focused on clients with short positions in their portfolios.
“Historically, we had outsourced the financing of these short portfolios to third-party providers such as the major prime brokers,” he said in Hong Kong last week. “However, due to growing interest from clients seeking a solution, we reviewed our servicing model and realized that if we were helping clients generate alpha on the long side, we should also be thinking about helping them generate alpha on the short side.”
A typical enhanced custody client would be a pension fund or manager with alternative strategies managed either internally or externally, who would engage State Street as custodian to the portfolio. State Street, through the enhanced custody program, would then also be appointed as the securities financing counterparty, supporting the investment manager with securities borrowing and financing requirements.
On the roll-out of the service around the world, Squillacioti said: “The vast majority of our existing clients today are headquartered in North America. We are currently expanding our servicing model to be able to support clients domiciled in EMEA and APAC, so we’re investing in putting resources on the ground in those local markets to replicate the service model that we have here in the US.
“These teams would include trading staff, sales staff, client service staff and support functions like legal, credit, risk, operations – everything needed to make the business self-sufficient locally. Our ongoing strategy includes developing that global footprint and adding local complements to the technology and financing platform that we have in place today. One example of this is the addition of an equity portfolio swaps, which is the synthetic version of what we do today in the physical lending space.”
The benefit to clients was that it offered a different way to finance assets, he said. Also, all financing was done at State Street within the context of the clients’ custodial account, which could create efficiencies and potential cost savings for clients.
“Pension fund clients who already have State Street as their custodian may also potentially utilize our self-borrowing facility to support the stock borrowing requirements of their alternative strategies. This potentially reduces the cost of running these strategies,” Squillacioti said.
He said clients saw State Street as a good alternative to conventional prime brokerage, using the custodian to complement their suite of prime brokers. This was particularly true for the hedge fund space. “We’re not a replacement for the prime brokerage model. Our balance sheet funding allows us to offer a different way of financing assets,” he said.
State Street is understood to have signed up one of its Australian clients already to the service.