14 Feb Toward a new vision of financial products
Riccardo Lamanna, Senior Vice President and Country Head, State Street Bank, paints a portrait of an institution awash in innovation and evolution.
You were appointed country head to lead the Luxembourg branch of State Street in August 2021. Would you tell us about your professional background and experiences and how they have led you to your current role?
I started my career just over 30 years ago working for JPMorgan in Milan for about seven years, a couple of those spent in London, in the investment banking back office and then at the securities services side of the business. During the last two years, I led the transition of the services business to Paribas, which I joined afterward in Paris to take on the role of product manager of the multi direct custody and clearing business. Toward the end of the last century, which is quite a long time ago now, I joined the Sanpaolo IMI Group, at that time of one of the most important Italian banks to lead back-office operations. After the merger with Banca Intesa to form Intesa Sanpaolo, now the largest Italian bank, I took the lead of the transaction management business.
At that point, my career turned; we entered into important strategic discussions which led, in 2010, to the sale of the business and hopes to have a stronger focus and generate value for our existing clients. After considering several potential acquirers we decided to partner with State Street, with which we had an immediate cultural fit and alignment of strategic focus for the business. Following the sale, I joined State Street as the Country Manager for Italy, a role that I covered for nine years through a full integration/transformation. In 2009, I moved to London to take over the general management of State Street Alpha in EMEA, which I led for two very intense years centered of the full deployment of the new front-to-back capabilities developed by the firm.
In 2021, the position for country head in Luxembourg opened up. I decided to go for it for various reasons, but one in particular related to the definition of the enhanced responsibilities of the role which appeared attractive to me. The country manager at State Street is now, in fact, part of the Institutional Services Division and together with segment heads, sales and relationship managers play an important role in the development of the business.
Can you tell us about the firm’s main facts and figures, including your reach and assets under management? What do you believe are the company’s primary competitive advantages both in Luxembourg and in the region? Why should investors choose State Street?
State Street in Luxembourg ranks number one in terms of assets served across the various lines of services; we serve roughly $1.5 trillion of assets across custody services, depositary bank, fund administration, transfer agency services, as well as a number of ancillary products which deliver high value to clients. Since we established our first operation in Luxembourg approximately thirty years ago, we have been growing year after year serving mainly third parties. The growth has been phenomenal in the past and continues to be so.
The success of our business here has been determined by many different factors: the talent and skills of our people, their dedication and commitment to the job and the clients, leveraging on the relationships that State Street has as a global provider. State Street’s global position is equally prominent, and many of our clients have decided to have large operations here, as Luxembourg is considered the hub for the manufacturing complex products as well as the building blocks of the various investment strategies that our clients deliver to their own clients through distribution in many different countries. State Street Transfer Agency helps our clients to distribute their products in 26 different countries around the globe.
Since our establishment, we have invested in our people through continuous training and mentoring. We have attracted expats who have brought their skills and expertise and, in many cases, decided to stay in Luxembourg for their entire professional life. We have developed expertise and skills to anticipate the needs of the market and we now deploy subject matter experts who can cope with all our clients’ needs regardless of whether they are linked to locally manufactured products or services delivered from State Street locations outside Luxembourg. And our employees have never hesitated to give back and help the communities through active inclusion and diversity networks as well as participation to and creation of initiatives for those who are less fortunate than us.
Together with other providers, regulators and authorities, we have contributed to the growth of Luxembourg as a very efficient ecosystem and one whose products are well-recognized across the globe. The Luxembourg UCITS V, as well as the most recent alternative investments products, are well known thanks to their high rate of innovation; they are managed by international players, can be marketed and authorized for quick distribution, and benefit from a severe upfront scrutiny and an ongoing strong oversight exercised by regulators.
In such an environment, State Street has fully deployed its innovative and pioneering approach to securities services. It was the first bank in the US to serve as a custodian bank in the early 1970s, when it decided to leave behind its retail business to become a servicing bank for financial institutions and intermediaries. Since then, it has gone through multiple acquisitions and new products and services launches. The latest of these is the creation of its Front to Back platform—State Street Alpha—born on the back of the acquisition of Charles River Development, one of the most functional and successful front office applications for assets managers.
The financial sector was not immune to the effects COVID-19. What would you say were the biggest challenges and/or opportunities that came out of the pandemic? How has the pandemic affected State Street’s institutional resilience? What were the biggest challenges or changes in navigating the pandemic and what do you believe will be the major long-term effects on the country’s financial sector?
The financial sector in general has reacted well to the pandemic essentially because it is highly regulated and well structured. We manufacture products that require, even without a pandemic, strong resiliency. We cannot afford to be out of the market even for a single day. Solid contingency plans and the nature of our processes made it possible for us to move 100 percent of our workforce to work from home almost immediately. It was the combination of well-structured processes and strong applications supporting them that allowed us to switch to home office overnight and continue to do our jobs highly efficiently and effectively.
Another important point that I would like to make is that, at State Street, the cultural aspect—in terms of risk management, respect, and inclusion—is very strong. These were the cultural traits of the company that helped us maintain a well-controlled work environment when we moved from physical offices to working remotely. Our inclusion aspect helped us to stay united. A number of initiatives were started—some independently by managers, but others triggered by the corporation—to continue to share information and never leave anyone alone. All of this supported our strong risk management culture and helped us avoid mistakes across the organization.
I particularly remember one example from India, one of our hubs where we have significant operations. The staff was advised to go home after the government imposed a strict lockdown overnight. Even in that case, we were able to sustain operational activity, distributing some of the operations across the world so that the Indian team could set themselves up at home and resume their activities once ready. The resiliency of our operating model is extremely robust.
There certainly were challenges, but in general, our culture, technology, resiliency, structure and processes genuinely helped us maintain a sound level of operations.
We are now facing some new challenges. We need to get back to the office because, while we were very effective in managing day-to-day activities, we believe that the physical presence of people and direct contact brings extra value. One thing is the simple ability to go to a colleague seated at the desk beside me and just talk about a situation. It is more difficult to set up a WebEx or a Zoom or a Teams meeting to discuss it. Today, in a hybrid work environment, we want to recreate the same experience that we have as human beings in terms of relationships. Therefore, we have reshaped our offices in a way that will allow us to have a blended environment that we believe is going to be even more effective from a production point of view. While we want to continue to give our employees the benefit of remote work in terms of experience, at the same time we recognize the need for a good level of physical presence and exchange of information, including in-person meetings. Luxembourg is somehow peculiar because we have a large number of cross-border employees who effectively are bound by strict tax limitation in terms of the time they can spend working from home. Our challenge as a corporation is also for those employees to benefit from working from home and, in a pioneering way, implement a solution that will help them should they need to come to work in Luxembourg on a daily basis.
State Street offers a full range of digital solutions for its clients. In what ways is the company driving innovation and staying ahead of the latest development in terms of cryptocurrency and other digital currencies?
When we think about digital, we need to look at various elements. A key one is related to infrastructure, the one in which State Street has invested the most. If you think about our world, it is one in which information is so important for everyone in terms of how we look at what we do, how the world is behaving and how we have to look at our investments and make decisions; data is more important than ever. In addition, we have a significant mass of data which is available in an unstructured way. The challenges we have are in terms of the integration and integrity of information and of how this leads to innovation.
If we think about integrity, a provider like State Street, that processes roughly 15 percent of the world’s savings, has access to a massive amount of data. That is why we need to reassure our clients that we can protect this data and use it in a correct way. This is one of the areas where we we have invested a lot. We are swiftly moving into cloud technologies to avoid the exchange of information as much as possible. We firmly believe that the cloud is the most advanced environment in terms of security of data.
In terms of integration, the issue here is to ensure that data, whether structured or unstructured, can be transformed into information. Data is not information unless it is well processed and made available so that innovation—such as artificial intelligence or machine learning—can effectively apply their capability. Modeling and risk managing need properly structured data to properly understand the risk our clients are running, what the market trends are, how they should invest their money with ex-ante and ex-post review, and how they can deliver correct reporting to the clients. When talking about digital, it is useless without an infrastructure that ensures the integrity and integration of data as well as the ability to apply innovative services, functions, and models.
Then we have all the digital cryptocurrencies, or digital assets which involve the creation of new products based on a completely new technology. In that sense, we have recently institutionalized our approach to digital with the creation of a new digital division, the focus of which is digital assets servicing. One of the first steps that we are taking is to become a custodian of digital assets. This is not as simple as it sounds, as digital assets are completely different from the assets that we normally handle.
Supporting investments in digital assets for our clients require specific processes and systems, meaning a complete review of the existing infrastructure that we have. We cannot simply apply existing processes to these novel assets. State Street has been among the most active in terms of digital ledger technologies, as well as the new products which are being created on top of them. This is all part of the process of becoming institutionalized and we expect it to be much like Alpha, like asset custody servicing and like our global market servicing.
Sustainable finance, corporate social responsibility, and ESG standards are becoming increasingly important for investors. In September 2020, Luxembourg became the first European country to launch a sustainability bond framework. In addition, the country’s Green Exchange highlights the importance of issuing sustainable securities. To what extent are sustainability issues driving where investors choose to put their money? What do you believe will be the biggest issues related to sustainable finance in the future?
The biggest issue we have at the moment is the collection of data for use in the investment process. Asset managers, owners and insurers who adopt ESG as an integral part of their investment culture and strategy need to demonstrate with facts how they apply their ESG strategy. In order to do that, they can move from the simplest black list type of exercises to the implementation of very sophisticated risk models incorporating ESG factors.
Let us focus more on the problem with ESG data coverage. Some corporations are well covered by providers, whether that be in the form of an analyst or a machine. However, there are a large number that are not effectively covered. This may be because they are too small, they are not yet structured to provide their corporate responsibility balance sheet, or they do not have a clear definition of what they mean in terms of ESG. That makes everything more difficult. One of the biggest issues is to collect information about ESG and apply it to the investment horizon. In that respect, you need to interface a large number of providers. It is not enough to have one. However, when you interface with multiple providers, you get information which is in many cases not immediately comparable. Some providers refer to specific data classification in a way that is different from others. There are overlapping issues and complementary information which need to be managed and compared. You must develop processes on integrating the information to make it available across the entire investment lifecycle.
Perhaps most importantly, in order to be effective in the implementation, you first need to adopt an ESG strategy. It must be built one hundred percent around ESG. In order to apply a proper ESG methodology, it has to be applicable to all the funds under management. Then you need to collect information and data that you can base your strategy on. This is where companies like State Street come into play, as they can integrate this data for them through data management platforms. At State Street, we have this embedded into our Alpha proposition.
The information is then stored and connected in the system that every asset manager adopts and can be used across different functions and services. Consequently, there can be no confusion. You will not run the risk of the front office asset location modeling using a different data set than, for example, the EU’s Sustainable Finance Disclosure Regulation reporting. Clients are demanding a set of data instruments which can be shared by all the different investment functions front to back. Thus, on one side you have the standardization of information and the availability of data, and, on the other, access to the same set of data regardless of the functions performed.
Finally, there is significant pressure coming from regulators for all banks to adopt ESG as part of their day-to-day operations. It has to permeate all our activities and be in all the risk evaluation that we do for ourselves and for our clients. This will require clarification and adoption of new processes and systems, not to mention a lot of work in terms of data integration.
Moving forward, what is your strategic vision and what do you most hope to achieve?
The mission of State Street is to become the provider of choice in terms of process outsourcing. That is our core service and we do it in an innovative way. We want to be our clients’ partner and share the risk with them in terms of investment and strategy. State Street does this through very efficient processes with a clear digital strategy in mind.
Luxembourg is no different, and we are refining the company’s overall global strategy into a number of actions that are specifically tailored to the local business. Luxembourg business is crucial for State Street, as we allow our clients to deliver products which are extremely complex into countries where they are not present. Just to give an example, in Luxembourg, we deliver products into 26 countries. These products are either used as part of more complicated ones, or to be sold and used directly by the final investors. We need to take our clients through this process. The number of markets we access is expanding. The recently announced acquisition of Brown Brothers Harriman (BBH), when finalized, will give us access to additional markets and will integrate the solid business model that BBH has with ours in terms of culture, systems, talent and skills.
We are focused on this business and have demonstrated through various acquisitions that we are not just here to just stay but, also, to grow significantly. Unequivocally, State Street is going to be a leading provider in the coming decades. We are going to be there with the ability—as was demonstrated in Alpha—to reshape our services, products and approach to anticipate the needs of our clients and take them through every stage of their development.
We will continue to focus on our people. We want to be an attractive place for those young talents that will give us the boost to innovate. We offer a very diverse and inclusive environment where staff can develop and deliver an entrepreneurial approach and take risk in a well structure environment that respects the rules of a systemically important institution.
Do you have any final comments for the readers of Newsweek magazine?
Luxembourg has a long, strong history of success in terms of supporting asset managers, and the proof of that is its value in terms of the market and the use of its financial products, as well as the ability to serve different asset classes. In particular, we see a strong growth in private equity and real estate which are end loans. We see many clients choosing Luxembourg as their location of choice to set up their vehicles for investments into private equity real estate and loans and then integrating those products into either a diversification of their investments or as their core focus.
The next horizon is digital, where we see a great deal of interest from the community of clients due to the ability of Luxembourg to deliver on digital assets. It is moving fast. We will continue to leverage the strong platform of traditional asset management, but we are quickly developing strong alternatives, such as private equity, real estate, business loans, and heavily looking into the next frontier of digital.
Luxembourg continues to invest and continues to be an excellent place to do business. It is supported by a strong regulator which is now part of the European Central Bank. Applying a methodology and standards as they have always done will guarantee correct business management to final investors. It is a good place to set up a business.