State Street’s recently highlighted dominance of Europe’s ETF servicing market certainly got many in the industry wondering if it is too big to fail.
As of the end of June, State Street acted as custodian for 67% of Europe’s ETF market, overseeing €942bn of the €1.4trn total assets under management (AUM) on the continent, according to data from Refinitiv Lipper.
This puts it well ahead of its closest rivals Brown Brother Harriman (BBH) at 8% and Societe Generale at 6.6%.
As first reported by Ignites Europe, some of the main concerns centre around the concentration risk from the group’s dominance as a fund administrator and the potential impact an IT failure would have in calculating an ETFs net asset value (NAV).
Others highlighted the impact on competition in the ETF servicing space.
Detlef Glow, head of Lipper EMEA research at Refinitiv, said: “I am a bit concerned about the high market share of State Street, as this may impact the competition in Europe since custody is a business where scale matters.”
He added State Street’s custodial dominance could have been one of (many) reasons its bid to take over rivals BBH fell through.
“Nevertheless, there are currently no signs of fractures or disruptions in the custody market,” he added.
Despite this, State Street argues its dominance has grown through its heritage in the industry and its ability to offer the most technologically advanced services over time. Not only is State Street the dominant force in Europe, but is the biggest ETF administrator globally, overlooking 2,700 ETFs across 13 countries.
Frank Koudelka, senior vice-president and global ETF product specialist at State Street, said: “State Street has a long and deep history of execution and resiliency of our global, proprietary technology platforms.
“This, coupled with around half of our fee revenue coming from servicing fees, makes State Street a pure play service provider.
“Overall, State Street's growing market share has been a net positive for the ETF market because we continue to invest in further automation, integration and straight-through processing.”
Now the group is turning its attention to an area of the market widely anticipated to be the next big growth area in Europe, active ETFs.
State Street was recently appointed to service the abrdn Global Real Estate Active Thematics UCITS ETF (R8TA), providing custody, fund accounting, order-taking and ETF servicing for the ETF that launched in March.
While some are concerned about its dominance, and others around the impact of ETF trading in the event of a system failure, it seems State Street’s control of the market has helped tighten its grip, but it will be up to other service providers, not regulators, to loosen it.
As Glow said: “State Street seem to do things right, otherwise they wouldn’t be so big.”
