New assets for old

Securities Services

New assets for old

June 2019

The opportunity for global custodians to earn revenues from interest rates on funds held on deposit has been suppressed by a low-interest-rate environment. flow talks to State Street’s Swen Werner about how digital developments can fill this hole and drive a new direction of innovation

Founded in 1792, US-based State Street is the world’s largest custodian bank1 with a mission to settle and safe-keep investors’ assets and help them to enter new markets. It is responsible for more than 10%2 of the world’s assets, with a reach of more than 100 markets, giving it a close-up view of the world’s investments and the clients it serves and leaving it well-placed to support them in an important area: the future of money.

With the growth of the digital economy, the penetration of new technologies from fintechs into every aspect of financial services has now brought this evolution to the disruption of money itself. The opportunities to create digital forms of money are substantial and timely, as an increasing number of millennials3 are favouring cryptocurrencies. These allow them to invest more quickly, giving them more control and escaping the cost, complexity and regulatory rigidity of traditional money.

As Managing Director of Digital Products and Innovation at State Street, this has Swen Werner deep in thought, mulling key questions such as what an asset is, how it could be fully digitised and what new services his organisation could provide. His exploration is timely, given that the low interest rate environment has amplified the competitive pressure to service traditional assets.4 Also, with asset managers under increasing fee pressure, custodians may herald the entry of institutional capital into the industry, acting as the missing link investors and asset managers have been seeking for entrance into the crypto market. A key driver for State Street is innovation, and how digital developments will impact its traditional role.

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More than just new technology

In particular, Werner is examining how processes and operating models would change as a result of these digital developments. He explains that instead of using technology to squeeze out improvements in the way custodians operate, “the industry must look at how it fundamentally improves businesses by thinking in terms of the future of money and markets, which is what the emergence of digital assets is about”.

So when fintechs proposed new ways of organising alternative assets such as art, gems or property to make them more tradable and more fungible, or inter-changeable, the financial industry took note. It considered how it could apply those models and ideas to traditional asset classes such as equities and fixed income in a process called tokenisation (i.e. by turning those assets into digital securities by creating a digital unit of ownership known as a securities token, which can be quickly and easily traded online with real-time price transparency). “While not necessarily the purview of the global custodian, these new assets can potentially open up new opportunities in markets that might presently be underserved by them,” Werner notes.


Rethinking assets and roles

His enthusiasm is underpinned by the promise of progressive change to the post-trade processes and the roles of custodians and other intermediaries, including the potential to eliminate the need for a central register or clearing house to certify ownership and clear transactions. In the future, networks of institutional actors may have access to the distributed ledger technology (DLT) network via a shared registry where the securities are traded, cleared and settled in the network almost instantly.


of millennials would invest in cryptocurrency if it was offered by a financial institution

Source: (eToro)

As a network participant, State Street is examining its core activities – custody, fund accounting and asset servicing – in this environment and looking at how cash and liquidity needed for securities settlement could be changed over time using some of these technologies. According to Werner, the application of DLT to these models is conditional on three requirements.

First, it needs the regulatory template to harness and create trust in digital money. Second, it needs the right ecosystem and market adoption. “The very nature of these technologies is such that a single organisation cannot bring it to fruition,” Werner explains. “It requires a collaboration or counterparties in the securities processing value chain to make it work and to deliver the benefits.” Third, for true delivery versus payment (DvP) of securities for cash and low risk settlement in a DLT environment to occur, the industry needs to solve one big puzzle: how to bring cash onto the ledger.


Come together

To facilitate DvP, a consortium of banks, including State Street, is testing how a counterparty risk-free cash asset could be created in a tokenised form. This would enable a formal transfer of ownership and an accurate cash equivalent for the transfer, in an effort to mimic what a real-time end-to-end transaction between members would look like. It would involve short-cutting the process of having electronic cash sitting in a central bank account, and centrally cleared, which moves through the normal pipes of the banking system, bringing it on ledger to facilitate peer-to-peer settlement. Non-bank investors would be given a cash token that would not expose them to more risk than they are currently exposed to in a traditional deposit model.

Werner expands on why such concepts are groundbreaking: “You almost start from the beginning by asking, how do I bring cash on ledger? This prompts a rethink of what money is and how we should operate,” he notes. “That’s why the work of the project – called Utility Settlement Coin (USC) – is so important. It brings together different business models at different parts of the securities value chain, which are starting to think those models through and which are spending time on how to make it work.”

For custodians such as State Street, the bringing of cash on ledger could mean an opportunity to offer differentiated products and services.


Letting go of old habits

Rethinking business models and market structures to realise those benefits requires a rethink of the process of securities transactions. Currently, a securities issuer pays its agent to issue securities, while an investor pays intermediaries to get access to those securities. These costs pay for the infrastructure that brings together the issuer and the investor. However, says Werner, “although we have organised our industry around certain market roles and certain activities performed by the banks, it does not have to stay like this forever. Habits can change”.

A tokenised DLT environment addresses that by collapsing the distance between issuer and investor through peer-to-peer settlement with direct interaction between the two (see Figure 1). According to Werner, it also presents an opportunity to readdress the classic charging model for securities trades, enabling other providers to generate services and revenues based on the decisions that somebody else has made. For example, a tokenised DLT platform could grant others access to provide collateral management services. Werner uses the analogy of social media to describe how other providers could enter the DLT platform and sell services to users based on who they are and what they do. “It’s not just about adopting technology to change operational process, it’s about changing the business model to pick up the benefits from that.”


Current realities

Thankfully, the industry is no stranger to changing operational processes and partnering to deliver benefits to clients. For example, the TARGET2-Securities (T2S) platform for the harmonised settlement of cross-border securities in Europe prompted financial institutions to rethink whether they need direct connections to each market. At the same time, Deutsche Bank, as custody provider, rethought its business and operating models, unbundling settlement from asset services to give clients greater choice. In re-evaluating its options for connecting to Europe post-T2S, State Street chose Deutsche Bank’s Settlement Hub in Frankfurt to provide a full service custody solution in core T2S markets, supplementing State Street’s direct connection and providing centralised cash and settlement services.

"We have a lot to learn from the experience we’ve gained through T2S and how we get ready for the next big change in the form of distributed ledger technology (DLT)"
Swen Werner, Managing Director of Digital Products and Innovation, State Street

The thinking behind this collaboration was that institutions still required custody services at the local market level for corporate actions, tax and regulatory compliance, which require on-the-ground expertise to balance the harmonised environment with the local expertise still required. “It’s a complex service to deliver and a complex service to consume,” Werner explains, “because within a market you have different risk responsibilities in terms of making sure the service is performed according to standards our investor clients expect.” State Street is collaborating with others in the industry to help address some of these barriers to a unified capital market for investors. These include differences in national rules relating to the standardisation of corporate actions, beneficial ownership in custody and the domestic withholding of tax regulations.


Future foundations

It is these principles and collaborative approaches that State Street is already applying to its exploration of DLT. As it did with T2S, it is leveraging the cash and liquidity expertise of industry partners such as Deutsche Bank to try to enable the settlement of tokenised assets. By working together, it is able to prepare for the future of asset services and new digital assets with a mindset that is open to thinking about what can be done in the value chain to save costs and create new services.

By coincidence, T2S has certain elements that almost brought up ideas for unbundling, allowing providers to separate their securities settlement service from their cash liquidity. These ideas are also relevant for blockchain, which separates core from non-core functions. “If I now move forward to blockchain, digital cash and digital securities makes it even more compelling to rethink what it is that I am good at, and how I would bundle my service provisions differently,” Werner maintains.

“What was very interesting as part of the exploration to allow for cash tokenisation was the interaction with Deutsche Bank’s cash and securities experts. That made it possible to think of fresh ideas, beyond the day-to-day, about what could be impacted by these DLT and blockchain technologies.

“For the first time ever, we can rethink operating models and business models to create digital services. That’s where a lot of our innovation focus is on and where, as an industry, we need to embark on this journey together.”

Werner concludes that the industry has a lot to learn from the experience it has gained through T2S and how it prepares for the next big change from DLT. While T2S is about the European currency settlement and certain markets, DLT, in theory, could be any currency and any market, but 24/7, 365 days per year. “So if you take many of the business challenges worked on in T2S and you put them in overdrive, that’s how I would view the challenges in the future of markets driven by DLT.”

For an organisation with a 227-year history, such forward-thinking approaches to safe-guarding and servicing assets seem as relevant today as they will be in the future, whatever form those assets may take.

The Deutsche Bank view

With the industry at an inflection point, one of the biggest waves of change to post-trade is not just technology and data. As many of our clients face fundamental cost pressures and regulatory change, it’s about recognising the fact that everybody can work together to deal with this inflection point. And as we look forward to the next few years, whether it’s regulation, new entrants or just that the fundamental bedrock of the asset management industry is changing, we need to remember that this is an industry driven by partnerships

Fiona Gallagher, Head of Securities Services, Deutsche Bank



1 See State Street 10-K (annual report) at, State Street holds assets under custody and administration on behalf of institutional investors of US$31.62trn
2 State Street and McKinsey Global Institute, Global Capital Markets, January 2018
3 See at
4 See at

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