Tobias Krause: All right. Well first of all, welcome and thanks everyone for joining us for this, first, regulatory discussion panel. And I just want to open by saying we are keenly aware that you all just came back from lunch and we all are going to talk about financial regulation. So our nber one goal is to keep you all awake for the next 45 minutes. our second goal is also pretty important. Our second goal is to give you an overview of the regulatory landscape and key changes that are impending that can affect both your business and the bank and dealer community that you deal with on a daily basis. And I think we have a great panel of experts to accomplish this. And, one thing that Lee already mentioned in his introduction is, Basel for you will also hear referred to it as Basel three endgame. And while that sounds like a sequel to some type of movie, it is simply, the finalization of the capital framework for the global banking industry. Now, there's really, you know, two main aspects to this, since this is a regulation that lays out how much capital banks have to hold for the various different business activities that they are engaged in, and from the risks that they incur from these activities. there's two things you should know about this. The first is capital is one of those things that is very fungible at banks. So capital is deployed in support of all different businesses at banks and dealers. And what that means is that, things like loans are affected over the counter markets like foreign exchange and securities lending are affected.

Tobias Krause: And that just means that many different industries and products are affected. And many, many different groups, industries and trade groups care about this issue. Now, the second thing I would point out is that Basel three endgame is, an implementation effort that will stretch over several years. It proceeds at different speeds in different regions of the world. Different local local regulators will make changes to the individual implementations. And what that means is that individual countries or regions end up implementing this at different speeds and end up making changes to the capital requirements for banks that are not the same across the board. And what you have then are competitive disruptions that put individual countries or regions ahead or behind others for different aspects of this regulation. And what that means is politicians now care about this an awful lot too. And in fact, I think we found a pretty good example to show you just how much of an impact this has and how unusually intense people are interested in this. And they've been actually TV commercials about bank regulation. You know, that's that's rare when you work in regulation. That's about as cool as it's ever going to get. When you watch an NFL game and there's a TV commercial about it. And we found one of these for you. it's on YouTube. You can all see it. And I think we should all take a look at this together. If we could please play the video.

Tobias Krause: In America, people disagree on just about everything except the Fed's new rules that would tighten capital markets. Experts say Basel three endgame will add more headwinds to the economy's growth, constrict the availability of affordable small business loans, make capital and credit more expensive, increase the cost of clean energy projects, increases borrowing costs. Everyone agrees it's a bad idea. Experts everywhere have doubts about Basel three endgame. Maybe you should too.

Tobias Krause: So I think you should let that sink in. This was about, you know, financial regulation. And it sounds like it's responsible for everything, including the high parking rates at this building. So clearly this is something that, you know, a lot of industry groups are working on. And it's something that affects products across financial markets. And what we really want to do here today is try to make this relevant for you. A large majority of you is on the buy side and you may think, well, it's a bank regulation. You know, that's something that I maybe don't have to deal with directly, but because a lot of the products and markets that you engage with on a daily basis are such big consers of capital and such big sources of risk, this is all impacted by it. Now, we would like you to take one minute before I introduce my fellow panelists and answer just one individual Slido question for us, and it's going to be very simply about your current take on this whole Basel three endgame affair. So I think you have the question up there. And please go ahead. We'll give this a minute or so. Right. All right. We got about 40 responses. That's pretty impressive. And we have, I think, a pretty even split between banks are impacted now. And the buy side will be soon. That's you know I think that's probably right. And but also a nber of folks who are openly saying that, you know, they don't have yet enough information to form an opinion. And quite frankly, that's one of the things we hope to remedy today. And with that, I will introduce our panelists. I think we are very well, prepared to help you address these questions.

Tobias Krause: And I'm just going to start, to my immediate left, we have Patricia Hostin with us today. Patricia leads, State Street's agency lending program. It's, a program that lends securities across the globe, across asset classes in various markets, over 300 billion on loan on a given day. And Patricia brings over 20 years of experience to to this role. And, relevant to today's panel, she is keenly focused across State Street and the industry on advancing solutions that help make this business more efficient. in the middle we have Joe Barry, and, Joe is the State Street's global head of regulatory and industry affairs, and he leads a team that analyzes and comments and lobbies on regulations around the world that affect State Street's business and that affect, you know, the products that you interact with on a daily basis. And Joe has worked extensively in industry and trade organizations. He's also on the board of the GSMa. And lastly, all the way to the left, we have Derek Guadagnoli. And yes, we do call him Derek G, who is who works on my team in global markets and is working on optimization initiatives for global markets products. And Derek's had a career of over 15 years, including experience in risk and financial resource management. And he is currently the one spearheading several initiatives that are aimed at improving capital efficiency and generating additional capacity for our trading businesses. And with that, I think we have a couple of slides for you that I will hand it over to Joe Barry for, and he's going to give you an overview of the regulatory environment and the changes that impact banks and customers.

Joseph Barry: Thank you, Tobias, and thank you everyone for being here. I it's I said I spend all my time on this, right? 100% of my time is trying to get rules and laws and regulations changed to the benefit of State Street and our clients here. So we don't even though my title sounds like it's more I don't do anything like the regulatory stuff other people do. I don't I don't deal with the day to day regulatory stuff. It's all about the policy side. And the team that I have is around the world. We have people in China and Europe and Germany and, down in DC to do this. So we I think we have an effective program there. I think I'll start. I mean, I'll focus mostly on Basel, and I'm actually fairly pleased with the results of the survey. At least we thought the nber one, I think we thought the nber one would be it's the bank's problem and I don't care. so that was good. Some some messaging. I don't know if it's the TV ads or other stuff, but something is penetrated. So that's, very helpful. And I actually say that is not it's not just this group here. Right. We've I'll get to the Basel in a minute, but the engagement from the industry and the buy side has been tremendous on this as well.

Joseph Barry: And it's really helped us quite a bit. You know, I think most of the folks probably are members of the AISI, which is the mutual fund trade association. They have engaged very heavily on this and they never engage on banking regs. Right. They always just do SEC stuff. So we've had good response there. But to put the Basel three endgame in context, if you look at this table here, it shows we could have even gone back even further. Right. I mean, these are these are the major banking rules of the last year. This is since 2008. So but if you go back, the Basel one I think was in 88, roughly something like that 80s. right. Basel two was a revision of Basel. That was the first kind of global capital rules for banks. And so those were pretty basic. Basel two was pursued in the early 2000. this was before the financial crisis. And so the Basel two rules were actually a lessening of the capital requirements that was being pushed at the time. Then the crisis came and they threw those out. And now we go to Basel three and Basel three endgame, which are substantial, ramping up of the capital requirements. So we've been on the upscale this I mean the the arrows go down because it's a, you know a time scale. But but the but every one of these rules has been that's listed here has been a substantial increase in banking regulations around capital and other things, some more than others.

Joseph Barry: But all of them are tremendously constraining to the banks. The only one that is not is 2018. The Economic Growth Act has 2155 was a law passed by Republican Congress that is actually a deregulatory bill and actually helps State Street and lots of other banks to everything else here is just tightening the vice. And I think some of the impacts, you know, I'm sure whether you're aware or not, some of the impacts you've already felt, right. I mean, the the Dodd-Frank act, which is a huge piece of it, right, in 2010, included the Volcker Rule. All, which was more new constraints on banks ability to do proprietary trading and some other investment fund things. And that, well, we can't kind of attribute sort a dollar figure to that, that clearly reduced liquidity in the markets. It de-risked banks and forced them to be less available to do various types of trading and all that kind of stuff. And then if you look at more recently at 2020, the Sacher rule, which is the derivatives rule, for which is the capital rule for derivatives that banks engage in the derivative business, including FX. Right, was an extremely big increase in capital for a lot of the products that we all depend on, you know, on the asset management side and elsewhere in the buy side.

Joseph Barry: So so all of these are big increases now they're calling it Basel three endgame. I think that, Tobias like a little fault there. Politically incorrect calling it Basel four because the regulators hate it when you call it Basel four. The industry has stopped doing it, but we used to all call it Basel four. It really is Basel four. It's a significant rewrite of Basel three. They want to call it Basel three, what they call Basel three endgame, because they don't want to suggest that they had to move on to Basel four. Right. Or maybe they're reserving Basel four for the next one. I don't really know. But it's a huge difference from what we, what we're currently under, which is Basel three right now. And I think as you can tell from the, you know, the ads that you've seen, the one that we showed and also you've probably seen some of the others that have been all over the place. And it depends where you live a little bit because these ads are very some of them are national, but some of them are targeted to certain areas. If you're in DC, you see them all the time in DC, you see, you know, the buses will drive by and it says Basel Basel three on it and, you know, stuff like that.

Joseph Barry: They have that's one of the one of the trade groups had one of those cars that has the sign on top driving around the capital in circles and stuff like that. So there's a lot of this going on, but a lot of it's quite targeted to, you know, as you all know, they're fairly sophisticated in the marketing side these days and can kind of micro-target to, you know, you can pick a member of Congress or a like, let me tell you that Jay Powell, who's the chairman of the Federal Reserve and kind of in charge of all this, I'm sure he can't like, walk around anywhere without seeing these ads. Right. They're all over the place. And the reason they're out there, and, you know, it's no secret who's funding these, right? This one is a little cryptic because it was listed as a I think it was Third Way or something like that. It's one of these kind of moderate think tank things. But everyone knows a bank funded it. Right? There's all funded by the banks. The other ones you might see actually say on a financial FSF, which is Financial Services For which is the association of the eight largest banks in the US, or the ag Sibs, and obviously the largest and State Street is one of them.

Joseph Barry: And so those ones were very public about funding these ads here. And this, you know, if you think about it from your own perspective, right? You don't the finance, unlike other industries, you know, if you pay any attention, you'll see even just watching TV on Sundays, you'll see stuff from the oil and gas guys or pharma or whatever. They run ads all the time, kind of pitch their things. Financial services really didn't do that much. Right. And I think it's because, you know, there's certainly was a lot because we're so heavily supervised. There was quite a bit of kind of fear of regulatory retribution. And you know that this isn't the right picture for things, but the, the big bank CEOs, you know, I'll tell you, they got together a year and a half ago and said, we have to speak up more, right? This is killing us. It's going to kill our clients. And so they have they have decided, quite unusually, to step forward and very publicly criticize the Federal Reserve and the other regulators for proposal they put forward. And that's what we're seeing today. it's had some success. I think that there's a the the expectation in Washington now is that the original proposal, which was quite bad, which I'll get to in a second, is going to be revised, and substantially cut back.

Joseph Barry: So we think it might come out a little, hopefully a little better than we think. But but there's no way to, I think there's no way to over emphasize how bad this proposal it was and was going to be for all of us. The overall impact of it would have been in the aggregate for the big banks of 33 or 34% increase in capital. Right. And, you know, all of these rules here have already constrained banks on capital already. Right. So capital is if anyone that works inside the bank knows if you're trying to do some business, you always have to think. You always have to say, well, how much capital is it going to conse and how does it compete with other possible uses of the capital? Right. It's a very limiting factor on a bank's ability to engage in any kind of business. or less so on sort of the pure servicing side. But anything engaging is kind of principle or anything like that, or lending anything bank like. It's very tough. And so, so the, the you probably have heard from other counterparties, you know, the big investment banks have been running around as, as have lots of others about the increase. And the simplest explanation I have is very simple for us. And then this is there's lots of things wrong with this rule, but this is one example that I hope will be clear to people.

Joseph Barry: So when you're calculating the capital that you have to apply to the bank, you figure out all these things. And some things have simple formulas, some things have complicated formulas. Then you get to the end of the calculation and you figure out this is the nber of, the potential capital nber you have. And then you have to apply what's called a risk weight, which kind of determines, you know, if I want to go into the calculation, but say if you came, you get to the point and then you apply the risk weight. But based in this case on the on the client type. Right. So we'll look at a client and say well this is an. Investment fund client. They have 100% risk weight. And then you move on from there. Right? It doesn't really matter what the risk rate is with 100%. It doesn't matter what the Basel proposal says for other types of corporate clients, not investment fund clients, you get a 60% risk weight. Right? So if you look at it from our perspective to do business with an investment fund client, which is our clients, you'd have to hold one and a half times as much capital as you would if you were to have a corporate business. Is that clear? Okay, I got it.

Tobias Krause: But it's completely risk insensitive.

Joseph Barry: It's completely risk insensitive, right. So if you had like, sort of if you had a if you. So if you're sitting here and not that we would do this because we have to you know, we have to fund our client services. But if you're a treasurer or a CFO of a bank and you're sitting there and you can either lend money to an investment fund or you can lend it to sort of a, you know, kind of mid-tier corporate type, you know, the publicly listed, but maybe not so great. And they're telling you that the capital requirement is one and a half times for the investment fund. But that's a lot of pressure not to service your investment fund clients. Right? It's a lot of pressure to move your business away from the business we have, which is focused on these exposures to investment funds into something different. And so that's to us the clearest. And these in this case, the, the, the credit quality of the investment fund is far and above any of these corporates. Right? I mean, a registered a registered mutual fund is a far better place to lend money to than a lot of these corporates. And so that's that's the kind of thing that we're dealing with here.

Joseph Barry: And that's what we're trying to fix. So that's why Basel is so important to us. I mean it really, you know, we are not contemplating of course, changing our business model or the way we service clients or anything like that, but we're trying to fix the rules so we can continue to do so in a way that's rational and reflects the actual credit quality that are to our clients. I think we're having some success. I think we're going to I think I think we're going to get some of this fixed, but it is a real threat to, to, to, I think ultimately to, to all of you. Right. Because at the end of the day, you're going to pay for this. you know, if, if it's a capital intensive, if providing if providing liquidity lines and overdrafts to mutual funds is a capital intensive business, someone's going to pay, right? There's going to be the client that pays at the end of the day. So we're trying to fix all of that. So I'll stop there. On the banking side and other comments from folks on that. Maybe I'll quickly go to the asset management side for a minute, but is that right? Yeah.

Tobias Krause: I think connecting this to the asset management side, who definitely felt the direct impact of Sacrt in terms of the spreads that everyone has to pay in the effects markets. Yeah, but unfortunately there's a lot more.

Joseph Barry: Yeah. This one, this one, we didn't put everything on this chart because there's just way too many things going on. Right. But this is similar to the other one where we show sort of the history of, you know, the major regulations in the US and the EU that have that we have worked on over the years and that are impacting us, and we start again with the financial crisis. And once again, all of these are ramping up and tightening. You're probably more familiar with these ones. There's only one good rule on this list, and I'll tell you what it is in a second. But all of these are ramping up of liquidity rules. Right. And also it's not liquidity rules. This every one of these is just either destructive to products. Just a lot more work. And you know, maybe some of them are justified right. Maybe some of them are not the one good rule. Maybe I'm missing one. But the one good rule there was the 2019 SEC ETF rule. I think if I think most people would respect that as a good rule, because that what that did is it took away the requirement that ETFs all had to get individual exemptions from the SEC to get authorized.

Joseph Barry: And so if you follow the rule, you don't have to go through that process anymore. So that was a streamlining rule. you know, I'm not sure every you know, it kind of depends on where you are commercially, whether you like it or not. Right. It's better for the ETF people than it is for like an active non ETF manager and stuff. But but it was a positive direction on the rule. Everything else is pretty bad here right. And if you look at the you know most people here will be familiar with the the agenda that Gary Gensler at the SEC has when he's proposed, you know 55 rules and they're slowly kind of finalizing them. I got a few of them on there. I mean, some of them, I mean, I don't know, I don't know if we call it t plus one a bad rule or not. Is it just I suppose it's. Probably not bad.

Tobias Krause: Probably inevitable.

Joseph Barry: Evolution. Inevitable evolution of things. Right. So that's not the same as the other. But you know, the new money fund rules are not good, right? I mean, I think there's a threat there to prime funds. You've got the what else we have the new names rule is nonsensical. It has all this like fixation on how you name a fund related to ETFs related to ESG and stuff like that. That makes no sense. Some of the new proposed rules still the one above it. The proposed new liquidity rule is the one you probably folks have heard about that require swing pricing for open end mutual funds, which would just which the US system is not set up for at all, and which would be kind of tough for folks. It would also particularly interest State Street Global Advisors. It would eliminate, bank loan funds. You could no longer put a bank loan. You have a bank loan fund of any kind because they're not deemed liquid enough. And Gary Gensler's mine. So a lot of these are quite bad. We've got some new ones coming down the pike on, liquidity ones mentioned. Again, the safekeeping is a custody rule. It's a terrible rule. predictive data analytics is another one. They're going to pull back. But the one plus. So all of these, this is just a growing, compliance burden for everybody.

Joseph Barry: A lot of these rules have no kind of really stated purpose. I mean, the purpose is because they kind of can do them and maybe they think they should or something. I mean, I guess the money fund rule had some purpose, right? Because there was some concern about the way that money funds behaved during certain crises. But so it's a very negative, I think, forecast going forward on the on the rule making front here. The only thing I'd say here is, once again, I think that engagement of the industry on this has been much more aggressive than it has been in past go rounds on all these things, all the all. A lot of the buy side firms are much more active now, and it's having some positive impact and some mitigating effect on this. I mean, there was the news today was that the one rule that's not on here was they they put out they finalized a little while back a new private fund rule that folks may be familiar with, which has tons of new requirements on hedge funds and private equity funds that the industry very strongly opposed. And they filed a lawsuit against it, and they won today. They won. So the the court threw out the SEC's private fund rule today. And I think that's going to be the path forward, for a lot of these rules, if they're adopted as as proposed here.

Joseph Barry: So I think there's some hope that that some of that gets involved. But I just don't know how. You know, I'm sure you're all feeling it, too. It's very tough to see how you can kind of run a business under this environment with all this, all this rulemaking going on. you know, even even when the other problem I got here is somewhat is even when you win on these rulemakings like on they had a rule proposed on securities lending reporting requirements, and they had proposed that you had to kind of maintain like a ticker through the day, sort of like all through the day. And that's not what Europe does, even. Right? I mean, so we we are in the weird position of going in and arguing, you should be more like Europe. And they did in the end, they did it. So it's a day end reporting. But now we hear that Finra, which has to implement the rule two, is reversing course and kind of going back to the original plan. And we have to go fight that again here. So some of these things are hard to put down. But I think I you know, I'm happy to take questions on any of the rules that are out there.

Joseph Barry: But I mean, I think we're, you know, until Europe is like a slow train that's, you know, I wouldn't have any hopes that you're going to dislodge it, but it doesn't move too fast. Right. So it's not as active as the US. The US will change based on the election, which of course is up in the air. We don't know how that's going to be. but you know, these I think that sort of active pushback from industry and both the banking side, particularly in the banking side, but also on this side, the asset management side has really been helping a lot. So, and we're always happy to talk to people, if clients and things like that that have interest in these rules. And so we can kind of integrate them into our program here we have a we have a fairly unique program. it's pretty unique actually, because we because we cover both State Street, the custodial bank and Ssga together. Right. So we kind of have both. And then we have all the clients that are more like Ssga. So we have a very kind of broad perspective on these issues. And we try as best we can to, to to try to keep in mind, you know, how clients are looking at these things as well as us. So, So I stopped.

Tobias Krause: So, yeah. Joe, I think you gave exactly the right keyword there. You would look at these and think it's all bad news, and you ask the question, how do you run a business in this environment? And we have two folks with us that are going to tell us exactly about that. And I think, on that cue, I will hand it over to Patricia.

Patricia Hostin: Great. Thanks. well, so Joe walked us through the evolution of regulatory reform, and you may be asking yourself why someone who runs a securities finance business is amongst regulatory affairs and risk and capital optimization folks. And the reason is we are very large consers of RWA and capital for the bank. So securities lending is the structure of the market is it is a double intermediated market. So you have large custody banks who generally are g-sibs like ourselves, aggregating supply of our custody clients and asset management clients facing off against other g-sibs global banks who are demand aggregators who are providing credit intermediation and demand aggregation for hedge fund clients. And so those two types of entities in the middle are facilitating the lending activity, the lending of custody client assets to facilitate the hedging and directional shorting activity of hedge funds. And so in between is a lot of vole running through capital constrained to sets of capital constrained, entities. And so, you know, the, the a lot of capital is required to support these businesses. So as a lender, we for the most part are indemnifying our clients against the default risk of our bank counterparties.

Patricia Hostin: And that is where the capital draw the RWA generation is coming from. The fact that a lot of our clients, we are indemnifying against that risk. So for our clients, it's a very low risk transaction, which is which is great for them. And we hold capital against that risk. And similarly for the banks that are doing the borrowing, they're facing off against our lending clients. And Joe did a nice job sort of explaining, you know, there is a difference client to client on what their risk weighting is. And there may be some clients that are more desirable to borrow from than others. But essentially these global banks are facing off and have credit risk against our lending clients. And that is the RWA or capital draw on the transaction from the borrowers. And so, you know, at the end of the day, capital is a finite resource in the middle here. So it's not increasing. If anything it's getting more more expensive and and a greater pinch point.

Derek Guadagnoli: Yeah. And you know, just to reiterate what Joe and Patty were saying, you know, at a high level, these reforms are really bringing, you know, these advanced approaches, these these internal models which were more capital friendly to this standardization. Right. You mentioned Sacher, Sacher, which was really the definitive point for derivative transactions. you know, specifically for FX, there are studies done at the time by CME and others that the impact of Sacher alone could increase capital 4,550% for the largest dealers. Right. This is even before endgame. and you know, that was highly dependent on your underlying portfolio of transactions, directionality, you know, State Street, large real money fund base, very directional, tenor and collateralization. On top of that, you have this event in 2021 or 2022 for Sacher. Sorry, but you also see this growth that's happening in the derivative space. So part of the Bank of International Settlements derivatives have grown 25% since 2021, from 94 trillion to 118 trillion. Right. So you have this combination of more stringent standardized calculations. On top of that, you have growth of derivatives and voles. A lot of those voles are coming from the client side. As as the voles grow with the market and the market valuations, there's larger hedges done by the currency managers. All those things together. You know, as Patty, you mentioned, capital is finite. This just means that, you know, we State Street and banks have to be innovative. We have to figure out how to optimize within the industry. We need to find out how to optimize and work and partner with our clients. To keep these capital costs down.

Patricia Hostin: That's right. And, you know, Basel is a tax on banks at the end of the day. And that that tax is increasing to, debatable, I guess degrees depending on the final rule. but the reason again, I'm the reason I am up here. And Derek, who spends a lot of time focused on effects, are up talking about regulatory reform and innovation in the space is because there's only so many areas across a bank where, a business can actually optimize for its capital consption. So there are just some places where they're, it's sort of you're unable to effect change and limit your, your footprint. And so we spend a lot of time thinking about innovative structures. The industry as a whole spends a lot of time working together on these sorts of things. So central clearing has long, long been a topic discussed across the industry for securities lending. I do feel it is gaining traction. And if anybody wants some insight on that, I'm happy to to to speak to it. a nber of vendors have popped up with a novel securitization structures on offer, intermediation structures where you have, you know, better credit intermediaries stepping in, where they have a little bit of excess capital to put to work, so that banks and, and other entities are working together on, on those sorts of structures.

Patricia Hostin: you know, prime brokers are putting in place agented models where they're taking themselves out of a principal role in the transaction to reduce their footprints. And as their prime brokerage businesses grow, there's guarantee structures and novel pledge and repo pledge backed structures. Where at the end of the day, it's really all about, collateral or margin. So these are credit exposures, sort of trades, but trades that have a life to them and an ongoing sort of credit exposure. And the way the, the RWA calculations work is, what is your credit exposure and who are you trading with. Right. So if at the end of the day there's no credit exposure because you have excess margin, that's great. It doesn't matter who you trade with, you have enough margin to cover it. So the industry is spending a lot of time working on on these types of solutions.

Derek Guadagnoli: Yeah. And I think in the derivatives space, certainly clearing is being looked at trading futures rather than swaps because you're going through a clear certainly portfolio optimization. And the dealer to dealer space was you know increasing post sacker world. There's you know vendors out there that offer those those services. and you know, their focus is on optimizing kind of the two directional trading that exists, you know, for clients SIM optimization or for, for mer initial margin, etc.. And I think, Patty, you covered a lot of the, the other ones, there's still, you know, CDs is available and the market, but really that's just moving exposure from one to another. That's not really bringing the the table down. So the market will continue to come out with these structured solutions on an industry perspective. And then again, us within State Street are also looking at ways that we can work with clients to come up with solutions to bring and reduce cost.

Tobias Krause: So one thing I think would be interesting also to our audience is from the customer perspective, from the client perspective, right. It seems like a new dimension is introduced here, which is it's been clear for a long time that as a client, you're competing for liquidity and capacity with, you know, dealers. But honestly, in good times that may not be very obvious. There may be ample liquidity to go around. But if you look at higher volatility regimes, right, if you look at, if all of these rules got implemented and, you know, Covid happened again, right, you know, can you talk a little bit about, you know, how important it is for clients to think about available availability of liquidity, especially in volatile environments, and how this may be impacted by these changes.

Patricia Hostin: Sure I was going to use the example. If you look at the slide actually up here, it's an amazing graphic. I know it's pretty impressive. Thank you. you know, it's really just showing there's, a spectr of RWA efficiency. So again, very touched or Jo touched on, you know, different client types will have different risk weights. and I guess a simple point I will make is the market always finds a way to be efficient, right? So whether there's a pinch point or a level of high volatility or low volatility, what we are seeing very much today in the securities lending space is the market is very actively finding a way to, brokers are borrowing from clients with low risk weights. Right. Because they have to hold they hold less capital on the back of that transaction. They are finding a way to those clients to source that supply from lower risk weight entities. And so it is my job, my business's job and responsibility to ensure we are thinking of every client, not every client of ours is going to be a sovereign wealth fund with a 0% risk weight. So we have created, you know, of course, we're working with industry and industry solutions. We are also working on proprietary solutions to ensure that any client can be an efficient client, a 0% risk weight client. And one example of something novel we're working on is using our strength as a custody bank to work with lending clients in our program to ring fence assets in custody to offset the credit exposure to borrowing borrowers to to borrower entities. And so it's that type of solution where we're partnering with clients, using our strength as a custody bank to essentially make sure that every client can be, you know, the first, second, last port of call for borrow. Yeah.

Derek Guadagnoli: Yeah. And from a derivative exposure, if you could just, you know, go to the next slide please.

Tobias Krause: Can we go back one slide.

Derek Guadagnoli: Thank you. Apologies. you know, a significant driver of the capital exposure that comes on the FX side is, is collateral, I should say lack thereof collateral, you know, in the client space because per regulations, clients are not required to collateralize forwards and swap activities. So, you know, under your, your standard, calculation here, you know, if you have $100 million USD sterling trade, 4 or 5% market move, roughly 7.5% of that notional goes towards your your regulatory exposure and that that's that's standard in the market because the forwards and swaps are not collateralized. Certainly in a post-soccer event, there was a lot of conversations banks were having with clients to potentially bilateral margin. the issue there is, you know, this is not all clients are operationally set up to do this. It's operationally intensive. They may not have the liquidity to post that collateral. Right. So kind of, tying into what what Patty said, we as a custodian are trying to look at solutions that support our custody clients as well. And there's two solutions that we're looking into in the FX space around memo pledging and custody collateral. And what I mean by memo pledging is effectively segregating assets within the custody account or another custody account. rather than having a client actually physically deliver that collateral and that wallet is segregated, it is not limiting that client's ability to sell that collateral. If you were to sell that collateral or those securities, there's processes in place that would release and substitute. That's one way, you know, where we as a custodian are able to make use of collateral and reduce exposures, you know, taking that a step further in the evolution, we have this concept of custody collateral. And what we're doing here is looking at a client's exposure.

Derek Guadagnoli: We're looking at the collateral that's within the custody account. And we're calculating a ratio of collateral over exposure. And as long as that ratio stays above a certain threshold, we actually wouldn't even memo pledge those assets. We would mark them and treat them and use them for regulatory capital purposes. But they wouldn't be segregated. Similar to the memo pledge process. It's only when you would dip below a certain threshold that memo pledge would be intact. And so what's nice about these types of solutions that it's transparent to the client. You know, State Street can do this on on behalf of of of our. Science. And again, there's automated substitutions that are happening. And this is happening in real time. Now naturally, there is docentation that would need to be put in place. This varies from client to client jurisdiction to jurisdiction. so, you know, we're looking through our client base and figuring out who is a good fit for these, these solutions right here. but, you know, at the end of the day, the purpose of these is really to partner with our clients. It's to build resiliency to future regulatory reform. Like I said, soccer was already like a 40% hit potentially to the banks end game. Could be another I think you said 2,025%. All this comes together, right? So you know, by participating in these types of structures and partnering, you can kind of reduce that impact of the regulatory reform on top of that. To your point, Tobias, when you talk about market stress and volatility, this is ensuring, you know these that, you know, in times of stress and high volatility that the liquidity will be there for the clients.

Tobias Krause: Now Derek, obviously a lot of these solutions that we're happy to to talk to clients about, right? I think they have one thing in common, which is it's sort of a mindset shift if you think about it. Right. We're asking we complain about regulation as we, I think have a right to, but then we go to our clients and say, you really need to partner with us and collaborate on things that are voluntary, right? But you know, that involve effort, that involve legal contracts and everything. Right? And I really think that is, you know, a shift in mindset, especially on the client side, that is required to really that requires them to really think ahead and say, well, how am I going to assure that I am a good looking client relative to other clients in the market? Right. And I think that's something that's going to take time to go through the industry and to go through different markets at a different pace. But I will just give one quick anecdote. In early 2022, right after Saqr or Sakr was became effective, right. Many clients, many of you in the room noticed that spreads in forward FX markets were increasing from various dealers across the board, and we ended up hosting a webinar with over 120 clients a couple months later where we actually put computational examples. I never thought I would do this, but we had 120 clients, and I was talking through mathematical formulas on capital requirements in FX markets. Right. And it is that kind of impact that usually was not really something you had to worry about as a client that I think is really going to yield dividends if you engage on this, and if you make this part of your of your planning, of your strategic planning in terms of how you access liquidity and how you deal with the dealer community, I think there's there's meaningful upside here. because as I think Joe made clear, the problems aren't running out anytime soon. do we have any closing remarks or any other, points you want to make?

Patricia Hostin: No, I was just going to say, there is an unbelievable amount of, I guess, parallel across businesses. and, you know, at the end of the day, you hit on it working with clients to really be thinking ahead. So when when we do speak to, if we reach out proactively or, or if you come to us with questions, we're really planning ahead. and you may say, why? You know, why is this important to me? I don't see really anything changing with my, my lending activity, today. And the answer is, like I said, the market always finds a way, right? It always finds a way for toward efficiency. And if you're a client that, you know, for the majority of our clients that are not low risk weight clients, being thoughtful about how you future proof your program, should be part of how you think about, you know, partnering with your, your custody bank or State Street going forward.

Derek Guadagnoli: I think that's absolutely right, Patty.

Speaker6: Okay. Okay.

Tobias Krause: Do we have time for questions? Yeah, I think we have a couple of minutes. So, if you still haven't gotten enough of regulation, now is your chance to ask us.

Patricia Hostin: Slido.

Derek Guadagnoli: Slido? Yes.

Speaker6: Oh, thanks. Okay, great. Okay.

Patricia Hostin: So I think there's. Is there a free form?

Speaker6: You can put questions. Yeah. Okay.

Tobias Krause: Yeah, some interesting questions already here. One is these regulations just feeding into the growth of the private market industry? I think that's a good one.

Joseph Barry: I think that's 100% true.

Tobias Krause: Yes. So the answer is yes on that one. That's an answer. Yes. Okay. Next next question.

Joseph Barry: In the same way the same way they're feeding into growth of a just private companies. I mean there's a lot of companies I won't list these days anymore, right. Because of all these. They're going back even further than that. But yeah, 100%. Yeah but but but but don't fear those markets are getting the attention of the regulators now too. So give them a little time and you'll see there's a lot going on there with a lot of concern by the regulators on those, on those markets as well.

Tobias Krause: Yeah I think there's another good one here. And this is really any of you can take this one. What regulatory outcome, what prospective regulatory outcome scares you the most for our industry. So what keeps you up at night.

Speaker6: I mean, it has to be for you. I'll go for it. All of them?

Joseph Barry: Yeah, yeah. I mean, I guess it kind of depends who you are, right? I mean, for for a custody bank. I'll tell you, the biggest concern we have is this really, really bad custody rule that the SEC has proposed, which I won't get into all the details of it, but it would kind of destroy the custody bank business model as we know it. So, so, so it kind of depends how narrowly you look at it. Right? I think for the, Let's see for the asset management industry generally, I think the biggest I think this is the thinking longer term, right. But I think the biggest concern that I would have looking forward more is more European side at this point, which is what they have a focus over there and what they call a macro prudential regulation of asset managers, which means not that you're going to be regulated for your own solvency and your own investor protection and everything, but you're supposed to be evaluated in terms of your impact on the society as a whole. So it's kind of an ESG type thing, but it's also financial, right? So you're kind of they're going to increase the regulation of asset managers in there and then sort of their societal impact, not just not just on themselves.

Joseph Barry: Right. And that includes things like, you know, are you supporting green? Right. That includes that. But it also includes things like on the financial side, like if you're if you're a fund and you want to get rid of some assets, right, right now you would just kind of think, well, what's the liquidity? How am I going to do, you know, what are redemptions? All this kind of stuff. You're also supposed to think about what's the impact of me selling these assets into the marketplace? Is that going to destroy everybody else's liquidity? Right. So it's a much more kind of comprehensive macro view of how asset managers should be regulated. And I think that's growing in Europe. And I think if it came to the US, it would be quite disastrous. So it's probably not one people have heard about. But that's the kind of thing I worry about, kind of getting outside the normal bounds of regulatory stuff, which is about, you know, safety and soundness for banks, investor protection for asset managers, and getting more into the role of financial institutions in society and what the obligations should be on that. And it's emerging very, very quickly in Europe.

Tobias Krause: Well, that's a great closing remark. And there's a good question here about liquidity. That will be the next 45 minute panel. And I would like you to join me in thanking our panelists today.

Thank you everybody. Thank you.

Speaker7: Thank you. You have the clicker.