State Street dominates the European ETF Servicing industry, servicing some 66 per cent of the European industry from its bases in Ireland and Luxembourg.
Ciaran Fitzpatrick (pictured), Managing Director, State Street Global Services, explains that the firm provides services to a large range of ETF issuers across Europe. These represent a mix of global ETF giants, issuers established in a specific segment of the ETF market, and new issuers looking to leverage State Street’s expertise to gain a foothold in the highly competitive ETF market.
Fitzpatrick says: “Currently Ireland is the domicile of choice for ETF issuers. State Street’s ETF business has grown from being a very small part of our business in 2010, to over USD490 billion in assets under administration at the end of 2018.”
He believes that there are a number of reasons for Ireland’s domination in the ETF industry in Europe, starting with the strength of the Irish ETF infrastructure, with its network of service providers, legal firms, management companies and audit firms who all have a deep understanding of the ETF market, and also the attention of a good regulator in the Central Bank of Ireland. Fitzpatrick mentions that the double taxation treaty between the US and Ireland also has its part to play in ETF issuers selecting Ireland as a domicile
“Historically, the Irish ETF market has been dominated by a small number of ETF issuers, offering mainly passive ETFs, which tracked vanilla indices. These global giants will continue to dominate the broad based passive segment of the ETF market”
However, Fitzpatrick observes that new players are coming to market, using their expertise to corner a certain aspect of the smart beta space. They focus on thematic, multi factors and factor investing in niches such as robotics, electric vehicles, healthcare and technology.
“ESG (environmental, social and governance) has also seen huge growth in the space,” Fitzpatrick says.
Fitzpatrick also predicts growth in the active ETF space in the near future, pending regulatory change from industry regulators across the globe. The SEC in the US is analysing potential disclosure requirement changes for active ETFs in the US. Approval of amended disclosure requirements in the US could potentially lead to European regulators changing transparency requirements for active ETFs. This would allow active managers to launch their flagship active products in an ETF wrapper.
State Street has an intrinsic understanding of the requirements to launch and service an ETF issuer in the European market. “We have leading technology that we have built in the 25 years of servicing ETFs,” says Fitzpatrick.
State Street has developed a strong core technology offering for ETF clients including the digitisation of accounting and custody services. The Fund Connect platform has also been tailored for the distinct needs of the European market through direct engagement with ETF Issuers, market makers and authorised participants utilising the platform for primary market trading.
The July 2018 purchase of Charles River Development has enabled State Street to offer a fully operational front-to-back service for clients, which is a first for the industry. “This will be very beneficial for our clients and our organisation, as it allows the firm to provide a truly integrated end-to-end experience for our clients,” Fitzpatrick says. There is also significant focus on continued integration of other asset management platforms.