State Street Report Takes the Pulse of Buy-Side Firms Mandated to Clear OTC Derivatives

  State Street Report Takes the Pulse of Buy-Side Firms Mandated to Clear OTC
  Derivatives

State Street’s SwapEx^SM Files Registration with the CFTC to Become a
Multi-Asset Swap Execution Facility

Business Wire

BOSTON -- July 30, 2013

Buy-side firms are unprepared for new trading mechanisms, costs and increased
complexity and should partner with established providers to adapt to an
evolved OTC derivatives marketplace, according to research commissioned by
State Street Corporation (NYSE: STT). The new research paper, “From Readiness
to Revolution: The Implementation and Impact of Derivatives Clearing
Regulatory Reform,” provides insight into preparations for swap execution
facilities (SEFs), central clearing, collateral management and reporting.

State Street, which operates as a futures clearing merchant (FCM) and a SEF,
commissioned the research with Aite group which surveyed buy-side firms that
collectively represent more than $6 trillion in assets under management. The
research highlights developments across the entire trade life-cycle and
includes a roadmap to readiness for Category III firms - those firms that have
yet to complete the Commodity Futures Trading Commission’s (CFTC) phased
implementation of derivatives clearing.

“The days of the excel spreadsheet are gone, collateral management has moved
to the front office and phones have been traded in for exchanges,” said Jeff
Conway, executive vice president and head of State Street Global Exchange.
Global Exchange brings together existing components from State Street’s
research and advisory, analytics, Currenex®, Global Link® and derivatives
clearing capabilities to address clients’ data information and trading
challenges. “As the trend towards electronification continues, regulatory
reform demands strong technology. We are well positioned to provide the
buy-side with solutions to these challenges across the entire trade cycle,
from execution to clearing to collateral.”

Key highlights from the research include:

Clearing and Collateral

Category I firms (companies that have completed the transition to mandated
clearing) report that first movers had the advantage to negotiate more
advantageous FCM agreements that allowed for preferential terms and conditions
relating to fees and margin requirements, while Category II firms (firms that
have also met clearing mandate requirements) later found FCMs less flexible in
their willingness to lower fees. Category III firms who have not put
agreements in place early will need to partner with well-established FCMs that
can quickly respond to their customers. Other findings include:

  *Firms tend to select FCMs based on financial stability and pre-existing
    relationships; for firms that had a pre-existing relationship, the FCM’s
    ability to bundle services to reduce cost became a consideration
  *Many firms have only on-boarded with a single FCM and clearing house,
    allowing only for short term compliancy rather than long term success with
    multiple FCMs to diversify risk exposure
  *Posting initial and variation margin continues to be an operational and
    technological headache; nine out of eleven firms indicate that they either
    already outsource the collateral management function or intend to do so
  *More than 60% of respondents indicate that staffing and timing are
    critically important, with frequency of collateral movements and impact on
    performance ranking “highly important” for more than 70% of those
    interviewed

Execution

On June 4, 2013, final SEF rules were published in the Federal Register that
provided clarity to SEFs wanting to enter this new marketplace, and
established an effective date of August 5, 2013. With the effective date
looming, “From Readiness to Revolution” not only addresses the anxiety the
buy-side still has over new trading mechanisms, immediately increased costs
and electronification itself, but also highlights the long term benefits that
standardized work flows and increased competition offer.

“The creation of SEFs will transform OTC derivatives markets, resulting in
economies of scale, reduced transaction risk, cost savings, and growth in
trading volumes and liquidity,” explained Conway. “State Street’s decision to
launch and apply early as a SEF before the effective date reflects our
determination to meet our clients’ needs and be one of the first providers to
help lead the way in a revolutionized marketplace.”

State Street filed registration documents with the CFTC today for SwapEx^SM to
become a multi-asset SEF. This submission establishes State Street as one of
the initial entrants into this market, and has ensured that it is among the
first wave of applications to be reviewed for approval.

By leveraging the core technology and best practices of State Street’s
Currenex, FX Connect and GovEx execution platforms, SwapEx gives clients trade
flexibility by providing multiple execution styles across numerous asset
classes. The platform will provide portfolio compression capabilities to help
relieve the regulatory burden of higher margin requirements. SwapEx adds
electronic execution to State Street’s existing end-to-end derivatives
solution, DerivOne^SM, which includes clearing, servicing, collateral
management, valuation, and risk and analytics.

About State Street Corporation

State Street Corporation (NYSE: STT) is one of the world's leading providers
of financial services to institutional investors including investment
servicing, investment management and investment research and trading. With
$25.7 trillion in assets under custody and administration and $2.1 trillion in
assets under management* at June 30, 2013, State Street operates in more than
100 geographic markets worldwide, including the U.S., Canada, Europe, the
Middle East and Asia. For more information, visit State Street’s web site at
www.statestreet.com.

* This AUM includes the assets of the SPDR Gold Trust (approx. $37 billion as
of June 30, 2013), for which State Street Global Markets, LLC, an affiliate of
State Street Global Advisors, serves as the marketing agent.

Contact:

State Street Corporation
Anne McNally,  +1-617-664-8576
aemcnally@statestreet.com
www.statestreet.com
@StateStreet