i

Crisis as Catalyst

Investment Operations Lessons from COVID-19

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.

1

2

Patricia HudsonGlobal Head of Executive Communications

and Thought Leadership

Lou MaiuriChief Operating Officer

Andrew EricksonHead of Global Services

Nadine ChakarHead of Global Markets

2

3

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

4

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

5

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

6

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

7

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

8

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

10

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

Important Information

This document and information herein (together, the “Content”) is subject to change without notice based on market and other conditions and may not reflect the views of State Street Corporation and its subsidiaries and affiliates (“State Street”). The Content is provided only for general informational, illustrative, and/or marketing purposes, or in connection with exploratory conversations; it does not take into account any client or prospects particular investment or other financial objectives or strategies, nor any client’s legal, regulatory, tax or accounting status, nor does it purport to be comprehensive or intended to replace the exercise of a client or prospects own careful independent review regarding any corresponding investment or other financial decision. The Content does not constitute investment research or legal, regulatory, investment, tax or accounting advice and is not an offer or solicitation to buy or sell securities or any other product, nor is it intended to constitute any binding contractual arrangement or commitment by State Street of any kind. The Content provided was prepared and obtained from sources believed to be reliable at the time of preparation, however it is provided “as-is” and State Street makes no guarantee, representation, or warranty of any kind including, without limitation, as to its accuracy, suitability, timeliness, merchantability, fitness for a particular purpose, non-infringement of third-party rights, or otherwise. State Street disclaims all liability, whether arising in contract, tort or otherwise, for any claims, losses, liabilities, damages (including

direct, indirect, special or consequential), expenses or costs arising from or connected with the Content. The Content is not intended for retail clients or for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulation. The Content provided may contain certain statements that could be deemed forward-looking statements; any such statements or forecasted information are not guarantees or reliable indicators for future performance and actual results or developments may differ materially from those depicted or projected. Past performance is no guarantee of future results. No permission is granted to reprint, sell, copy, distribute, or modify the Content in any form or by any means without the prior written consent of State Street.

The offer or sale of any of these products and services in your jurisdiction is subject to the receipt by State Street of such internal and external approvals as it deems necessary in its sole discretion. Please contact your sales representative for further information.

©2020 State Street Corporation

All Rights Reserved

3096488.1.1.GBL.RTL

Expiration date: 5/31/2021

State Street CorporationOne Lincoln Street, Boston, MA 02111

www.statestreet.com

For more of our executive insights on the impacts of the pandemic, read our Crisis as Catalyst series and visit statestreet.com/ideas.