On Monday, State Street Corporation (STT) announced the reinforcement of its derivative services with a number of improvements that will enable the clients to prepare themselves for any regulatory change impacting the derivatives sector.
 
Of late, State Street has commenced Government Accounting Standards Board (GASB) reporting services, which will be of greater help for the clients to better understand the character of derivative dealings and the risks associated with them – including credit risks, interest rate risks and foreign currency risk. The GASB services will be useful to public pension funds in abiding by the GASB Statement Number 53 and Accounting and Financial Reporting for Derivatives Instruments.
 
State Street has been launching new products and functionality to computerize the processes and help its clients to follow new regulatory necessities. The company’s derivative services and reporting potential place it at a higher position in the industry and enhance its clients’ ability to be ahead of the shifting economic environment.
 
The on-demand reporting ability of State Street will help clients to follow the added disclosure required for the varieties and fair value of their invested derivatives and evaluate the related risks. Aimed to provide transparency to the client portfolio, the latest offering joins State Street’s group of regulatory reporting means for derivatives transactions, which also consists of Financial Accounting Standard Board (FASB) 161 and 157.
 
State Street’s derivatives trading platform – the Over the Counter (OTC) Hub – recently added its 192nd client. In order to link industry-related and third-party providers, the OTC Hub utilizes Financial products Markup Language (FpML). This platform is integrated to OTC Hub and comprehensive collateral management services that helps to lower pricing and counterparty risks.
 
Earnings Recap
 
State Street reported first-quarter operating earnings of 75 cents, in line with the Zacks Consensus Estimate. However, the results were down from the prior-year quarter’s earnings of $1.04 per share. In the reported quarter, State Street saw an increase in revenues and its assets under management improved modestly. However, the expenses increased significantly compared with the prior-year period.   
 
Given the ongoing turmoil in the mortgage market, we are significantly concerned about the sizable exposure of mortgage-backed and asset-backed securities in State Street’s investment portfolio, though it is diversified in its asset class. We expect impairment charges on these exposures to negatively impact the company’s financials in the near future.
 
However, we believe that prudent cost control and strong regulatory capital ratios along with robust core servicing and investment management franchises will help it offset the volatility caused by the global economic turmoil, thereby providing buoyancy to growth in the longer term.
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