紐約梅隆銀行 (BK) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter 2014 earnings conference call hosted by BNY Mellon.

(Operator Instructions)

Please note that this conference call and webcast will be recorded and will consist of copyrighted material.

You may not record or rebroadcast these materials without BNY Mellon's consent.

I will now turn the call over to Mr. Izzy Dawood.

Mr. Dawood, you may begin.

Thanks, Wendy.

Welcome, everyone.

With us today our Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as our executive management team.

Let me take a moment to remind you that our remarks today may include forward-looking statements.

The actual results may differ materially from those indicated or implied by the forward-looking statements as a result of various factors.

These factors include those identified in the cautionary statement in the earnings release and those identified in our documents filed with the SEC that are available on our website BNYMellon.com.

Forward-looking statements in this call speak only as of today October 17, 2014 and we will not update forward-looking statements.

Before we begin, I would like to note two changes in our earnings materials.

First, we have introduced a financial highlights presentation, which is a summary review of our revenue, expense, and business segment trends along with related commentary.

We will use the financial highlights presentation to discuss our results.

In addition, we have consolidated our earnings press release and earnings review documents into one earnings release document.

The earnings release and financial highlights presentation are available on our website.

Now, I would like to turn the call over to Gerald.

Gerald?

Thanks, Izzy.

Good morning, everyone, and thanks for joining us this morning.

Let me highlight some of the key takeaways for the quarter.

We achieved continued momentum in Investment Management and Investment Services as we saw strong fee growth in these businesses reflecting our focus on developing and delivering the very best capabilities in the marketplace.

We drove continued progress on the expense control front, as our expense growth rate was well below the growth rate of our fee revenues.

We maintained a strong capital position, which prepares us well to comply with all the regulatory requirements while allowing us to continue to invest in our businesses and maintain a high capital payout ratio.

As you can see on page 3 of our highlight deck, we had earnings per share of $0.93.

That included $0.29 per share for previously disclosed gains net of litigation and restructuring charges.

Investment Management had another excellent quarter.

With investment management and performance fees up 7% year over year.

Assets under management increased 7% to a new record $1.65 trillion driven by net new business.

Also during the quarter, we had $13 billion of net long-term flows reflecting the strength of our liability driven investment strategy.

Interestingly, we also had $19 billion of short-term inflows.

Turning to Investment Services, fees grew at 5% year over year, driven by strong growth in asset servicing, clearing, and treasury services, which more than compensated for a decline in issuer services.

So in spite of the continued runoff in high-valued securitizations in corporate trust, Investment Services, overall, had a very healthy revenue increase.

Assets under custody or administration were up 3% to $28.3 trillion.

In foreign exchange, our continuing enhancements are helping us gain new clients on our FX platform.

That contributed to the sharp volume gains that helped mitigate the significant decline year over year in industry-wide volatility.

Now of course recently, market conditions have increased that volatility, which is generally good for market participants.

We also saw an increasing contribution from our collateral services, which helped our growth as clients are increasing their use of our optimization and segregation solutions.

On the expense front, our aggressive commitment to reducing expenses and improving productivity is showing up in our numbers, particularly when you look at the trend in staff expense.

Our normalized expenses were flat year over year and up only 1% sequentially.

Very strong results when given against the revenue growth that we experienced in Investment Management and Investment Services.

Our capital position remains strong, even after giving effect to the repurchasing of 11 million shares during the quarter for $431 million.

Interestingly, we have repurchased about 3% of our shares outstanding this year.

We also delivered an outstanding return on tangible common equity of 18% for the quarter.

All in all, good fee momentum, good progress in reducing the growth rate of expenses, and an enviable capital position.

At our investor day conference on October 28, we'll discuss in more detail how we plan to enhance our revenue growth, continue to control expenses, manage to the new liquidity and capital standards, and how we intend to deploy the significant level of excess capital that we generate.

Now, much of the focus will be on the work underway to maximize returns and create value for our shareholders, above and beyond what we're delivering today.

Importantly, we'll also share some key performance targets that you can hold us accountable to.

Before I turn it over to Todd, I want to highlight two recent actions that we've taken as we continue to optimize our business mix.

First, we repositioned our markets group, exiting derivatives sales and trading.

This will improve our operating margins and return on capital.

We simply were not a large enough player to get an adequate return on capital and bare the increasing risk management oversight costs.

Second, last week we announced an acquisition that will add new specialized fixed income solutions to our diverse portfolio of capabilities.

We agreed to acquire Cutwater Asset Management, which is a US-based fixed income and solutions specialist.

They have a 20-year track record and approximately $23 billion of assets under management.

Cutwater will operate as part of our Investment Management unit and work closely with Insight, our highly successful LDI specialty boutique.

It will allow us to extend our LDI and fixed income specialist strategy into the US marketplace.

We're very excited about that acquisition and also the repositioning of our markets group.

With that let, me turn it over to Todd.

Thanks, Gerald.

Page 5 of the financial highlights documente details our reported results.

As Gerald mentioned, we had EPS of $0.93 that included $0.29 per share for those previously disclosed gains net of litigation and restructuring charges.

As you look at our numbers, you'll note that we had a $0.01 benefit related to our loan loss provision credit, so we see it as a $0.63 quarter.

Given the significant asset gains in the quarter, I think it's best that we start with the summary of our adjusted results, which are on page 6. Revenue was down year over year as strong growth and Investment Management and Investment Services fees was offset by lower investment and other income and lower net interest revenue.

However, if you look at our revenue excluding the volatile investment line, it was up about 2%.

I will provide more color on the revenue drivers shortly.

Expenses were flat year over year and up slightly sequentially, representing the continued progress on expense control.

Our operating leverage was up 245 basis points year over year, if you exclude the impact of the investment and other income.

Our pretax margin was 29% and our return on tangible common equity with a strong 18%.

On pages 7 and 8 we will call out some business metrics that I think help explain our underlying performance.

In terms of our Investment Management business, on page 7, you can see that record AUM of $1.65 trillion was up 7% year over year driven by higher equity market values as well as net new business.

During the quarter, we had net long-term inflows of $13 billion and short-term inflows of $19 billion.

On page 8 you can see that assets under custody and administration at quarter end were $28.3 trillion.

That's up 3% year over year, primarily reflecting higher market values.

Linked quarter, AUC/A was down 1% due to lower market values at the FTSE, MSCI and the Barclay's Bond Index were all down in the quarter.

We had an estimated $115 billion in new AUC/A wins during the quarter.

Many of our key metrics showed growth on year-over-year basis as well.

The market value of securities on loan at period end showed strong growth.

Average loans and deposits in Wealth Management and as well as in Investment services continued their trend upward.

Our key broker dealer metric of average of tri-party repo balances was also up.

Our clearing metrics were also good.

Although DARTS volumes were off slightly as we typically see in the third quarter, active clearing accounts were up and long-term mutual fund assets showed especially strong growth.

The number of DR programs declined in the quarter reflecting an increase in the number of terminations that exceeded the number of new issuers.

In addition to that, we continue to maintain our pricing discipline in this business.

Looking at fee and other revenue on page 9, asset servicing fees were up 6% year over year and up slightly sequentially.

The year-over-year increase primarily reflects organic growth, higher market values, net new business, and higher collateral management fees.

Sequentially, organic growth was partially offset by seasonally lower securities lending revenue.

Clearing fees were up 7% year over year and 3% sequentially.

Both increases were driven by growth in clearing accounts and mutual fund positions and by overall higher asset levels.

The sequential increase also reflects higher DART volumes.

Issuer service fees were down 2% year over year and up 36% sequentially.

The year-over-year decrease reflects lower corporate trust fees partially offset by new business in DRs.

The sequential increase is primarily due to seasonally higher dividend fees partially offset by lower corporate trust fees.

When you look at our Investment Services, you will see that our investment services fees as a percentage of non-interest expense, what we call the coverage ratio, was 100% in the third quarter.

That's up approximately 300 basis points from the year-ago quarter primarily reflecting strong fee growth with little changes in our expenses.

The impact of currencies for the full quarter had a neutral impact to our pretax income, but it's worth noting that it caused a slight revenue increase that was offset by an equal expense increase, most of that impact in Investment Management.

Investment management and performance fees were up 7% year over year and down slightly sequentially.

The year-over-year increase primarily resulted from higher equity markets, the currency impact and higher performance fees.

The sequential decrease was driven by seasonally lower performance fees.

FX and other trading revenue was down 4% year over year and up 18% sequentially.

FX revenue of $154 million was unchanged year over year and up 19% sequentially.

Year over year, higher volumes offset lower volatility.

As Gerald mentioned, the enhancements we've made to our FX platform helped us capture more client activity.

The sequential increase reflects higher volumes.

Turning to page 10 of the financial highlights, you'll see that net interest revenue on a fully taxable equivalent basis was down 6% versus the year-ago quarter and essentially flat to the second quarter.

The year-over-year decrease primarily resulted from lower asset yields and lower accretion that was partially offset by higher, average interest earning assets and of course those assets were driven by higher deposits.

The net interest margin for the quarter was 94 basis points.

It's down 22 from the year ago quarter and 4 from the prior quarter.

Now, we also point out here that euro denominated deposits now make up approximately 15% of our average deposit liabilities.

During the quarter, as you're probably aware, the European Central Bank lowered the rate it pays on funds left at the bank to minus 20 basis points.

To mitigate the impact of that move, we've taken a number of actions.

As of October 1, we began charging for deposits.

We're also continuing to reduce our interbank placements, and as we mentioned before, we are increasing high-quality liquid assets with the cash related to that.

For the quarter, our securities portfolio increased by $10 billion.

That's about 10%.

We added agencies, treasuries, and sovereigns, thus increasing our high-quality liquid asset portfolio.

Turning to page 11, you'll see that non-interest expense decreased slightly year over year and was up 1% sequentially.

We reduced staff expense year over year as lower pension expense and the impact of technology insourcing and streamlining actions offset higher professional legal and other purchased services, the currency impact and the annual employee merit increase.

The sequential increase primarily reflects the incentive reduction recorded in the second quarter that was related to an administrative error as well as the impact of the factors that I just noted.

You'll notice headcount increased by 100 year over year.

It was down by 200 sequentially.

I want to remind you of our technology talent strategy of insourcing developers to reduce our application development costs.

Year over year, we have eliminated more than 700 contractor related roles in technology and replaced them with permanent staff.

Despite this, our employee count is only up 100 positions and compensation expense is lower, clear evidence that the strategy is working.

As we indicated last quarter, we continue to believe that our operating expenses for the full year should be about flat.

Turning to the capital ratios on page 12, they were unchanged despite the growth in capital.

This was largely driven by an increase in risk-weighted assets that's associated with the calculation for operational risk.

Our estimated supplemental leverage ratio was down 10 basis points to 4.6% due to the increase in our balance sheet in the third quarter.

A few points to factor into your thinking about the fourth quarter, we would expect a reduction in depositary receipt fees and there'll be a limited offset in expenses on that.

Seasonally higher performance fees in the fourth quarter will somewhat mitigate the DR drop off but will cause a related expense increase.

Net interest to revenue is expected to be approximately flat to the third quarter.

Expenses should be up sequentially driven by seasonally higher business development, legal and consulting expense, as well as the higher staff expense reflecting the rise in performance fees.

The effective tax rate should be around 27%.

Finally, we intend to continue to execute on our the CCAR capital plan, of course subject to market conditions.

All in all a strong quarter.

Good fee growth in our two segments, good expense control, and we continue to execute on our capital plan.

With that, let me hand it back to Gerald.

Great.

Thanks, Todd.

Wendy, I think we can open it up for questions now.

(Operator Instructions)

Glenn Schorr, ISI.

The question I have is, it's not a big move, but capital ratio is down a little bit, SLR down a little bit.

Wondered if you could just give a little color around that?

Sure, Glenn.

This is Todd.

In terms of the risk-weighted asset ratios, you did see a little pop in our capital.

It was somewhat offset.

It would have been larger but there was an OCI adjustment related to the accumulated transaction account, largely driven by the change in the dollar value over the quarter.

If you look in the denominator, on the risk-weighted assets, there was a pretty significant increase related to operational risk and what happens, those models are informed by external losses.

There have been quite a few external losses, even though they're not losses that we've incurred.

When others take large provisions it can inform those models and drive higher operational risk calculations.

That's what we've seen.

And what is ops -- RWA as a percentage of total?

I don't think we disclosed that, but it is a substantial percentage of the total, for the advanced approach.

It doesn't apply to the standardized approach.

Okay.

If you notice, Glenn, that's why you'll see the standardized approach actually increased.

Yes.

I got it.

Okay.

You said limited to one.

I appreciate it.

Thanks Glenn.

Thanks Glenn.

Ken Usdin, Jefferies.

Good morning.

Todd, I was wondering if you could expand a little bit upon the pushes and pulls within NII as it relates to LCR, the final rules?

You addressed the commentary about extending placements and charging for the deposits.

But just on LCR and just how much more you need to go and then how you'll be adjusting to the final rules?

Thanks.

Sure.

As you know, we got the final rules earlier in September.

They were a little more favorable for the treatment of operational deposits.

They're a little tough on muni assets, for example, so we look well positioned.

Our estimates, right now, and these are estimates and obviously it's easy to compute the high-quality liquid assets.

It's still fairly difficult to compute the actual denominator, but our estimates are that we are well in excess of the 80% that we need to be on January 1.

Given that, we still are looking to do a little restructuring and some of that you might note in what we did this quarter.

Municipals are down a little bit.

That's still open for discussion.

There is a possibility that that position on municipals could change.

Agencies, treasuries and some sovereigns we increased as we brought down some of our placements.

We are actually, Ken, we're going to give a lot of detail on this on the investor day, but I think the good news is we're meeting the standard.

We are well positioned to meet the future standard.

It's not having a dramatic change in our portfolio or in our estimates around our net interest income.

Okay.

Thank you, Todd.

Thanks, Ken.

Betsy Graseck, Morgan Stanley.

Hi.

Good morning.

Morning.

Just want to understand the methodology and process for charging for deposits over there in Europe?

Just wanted to make sure I understood how you were doing that?

Is it a one-size-fits-all?

Is it how you're dealing with how people paying via soft dollars, if you could just give us little color there?

Betsy, why don't I Brian Shea address that.

Brian?

Hi, Betsy.

Generally, what we're doing is essentially passing through the 20 basis point fee that we are absorbing from the European Central Bank.

Clients understand that we are actually not initiating this, but actually passing through the fees that we're absorbing.

We are working collaboratively with our clients to help them manage their cash in a way that reduces their exposure to that, and to the extent we can find other short-term investment vehicles or off balance sheet cash management vehicles we're helping them do that to reduce their exposure to that cost.

If you had had people leaving excess deposits as a form of paying you for services, does that then drive some higher hard dollars fees if they are moving off of soft dollar pay?

Well, generally, with rates being so low, there's really been no earnings credit on their deposits to start with, so there really isn't that issue and that hasn't been for some period of time.

We are really just trying to work with the clients to make sure that they have as limited amount of deposits on our balance sheet that they are subjected to that cost.

So in some ways we're seeing some of our euro deposits come down, not surprisingly, which is good because we don't have to hold capital against it either.

Right.

We're really trying to work very collaboratively with our clients to mitigate that cost.

There really hasn't been any earnings credit on their deposits to start with.

Typically, that's not something that takes place much in Europe.

It's nowhere near like in the US.

Got it.

You're two weeks into it -- I mean I guess the question is how much impact do you think this is likely to have on being able to shrink the balance sheet?

Yes.

I think the -- not a whole lot, Betsy, because we are seeing everybody else do it.

This is becoming a fairly common practice.

We have seen -- we've indicated we had about 15% of our total deposit base is in euro, is denominated in euro.

We've probably seen that come down a little bit.

Alright.

Thank you.

Thank you.

Alex Blostein, Goldman Sachs.

Great.

Thanks.

Good morning, everyone.

Just another follow up on the balance sheet.

We've seen the deposits continue to balloon across the system for some time, or you guys in particular.

Do you guys have a slightly better sense -- the source of these deposits is essentially the same clients or are you starting to see a different mix shift within that?

Just as a follow up to your point on moving some of the cash into securities portfolio, can you give us a sense of the pace at which you guys are willing to do that and does the current move-in rates change that strategy for you at all?

Sure, Alex.

Why don't we start with where the deposit growth has come.

I think there were some dislocations in the third quarter.

I'd say there are a couple of drivers to that.

I mean, one of the things that you saw is that the Fed put a limitation on its total amount of reverse repo that it intended to do at quarter end, so it reduced it from really no cap to $300 billion.

That meant that, toward the end of the quarter, that there was substantial money market funds that had nowhere to place the funds, so the likely recipient of that is going to be the custodian for those money market funds.

I think that's a little bit of a temporary distraction, if you will, or disruption.

I think also you've seen the large dealers take down their matched books, which had a similar impact, and it was a particularly important period.

I think this is a permanent reduction, but right now the impact of the reduction is ending up in the banking system and it needs to work its way through.

We do think we'll probably see a little bit more of this before we see this cash find a permanent home.

In terms of your other question, I think we made substantially -- we did increase the duration of the securities portfolio in the third quarter a little bit.

I think now the repositioning is going to be what do we want to do within the HQLA?

We do have a fair amount of central bank deposits.

They're low risk.

They're low yield.

And really the only action that you could take would be to extend duration within that portfolio, if you wanted to increase the NIM.

I think we'd be a little bit defensive about that.

There is potential capital risk to it and I think the opportunity cost to taking on very low yielding securities at this point is pretty high.

Got you.

Makes sense.

Thanks.

Thank you.

Brennan Hawken, UBS.

Morning, guys.

Morning.

So a quick one.

Could you -- just because it would be helpful to try to -- when I think about how much of these restructuring and litigation is environmental and how much is management action, is it possible to break those two out or at least give us some color on how those breakdown?

Also, why the litigation restructuring drove up the tax rate?

Was there an accrual for fines or something in there?

Just maybe help us understand that?

Okay.

There is about $60 million of restructuring expenses and about $160 million of litigation expenses.

When we look at the restructuring, that's largely around the actions that Gerald mentioned around the markets group, and we think that's going to have some long-term positives for us.

I would say that when we think there's appropriate actions like that to take in the future, we will take them.

In terms of the litigation, we apply a tax rate that's reflective of the jurisdiction related to the matter and that's why that tax rate was relatively low and the after-tax impact relatively high.

Got it.

Okay.

Thank you.

Then, thinking about volatility, here we've seen not only last quarter that are reflected in results but quarter to date, a lot of the investment banks have walked through how the volatility we've seen here in this current quarter is not really as helpful to drive revenues.

Is that also what you're seeing or is volatility volatility and you're going to benefit on either side?

In other words, are the trends that we've seen so far sustainable here into the fourth quarter from your perspective?

Yes.

Just a quick comment on that.

Some level -- volatility is generally, as we said, is helpful to most market participants.

That being said, with more and more going to electronic trading and more and more within defined spreads and more and more within a very narrow range, the volatility benefits that we've all experienced in the past are less, but volatility generally helps.

More important for us, since most of our foreign exchange trading is really on the backs of our servicing businesses, it's more important for us to capture volumes.

We're volume driven shop and that's why we feel pretty good about the level of volumes increases on our FX electronic platforms associated with our Investment Services businesses.

So, generally it helps, but it's not nearly as impactful as it once was.

I would add to that the volatility we look for primarily, since we're not a big fixed income or equity trading shop, it's really around our FX business, is related to FX.

We do print a volatility index number that I wouldn't say is perfectly correlated but it's correlated to what we're looking at.

You can see in the third quarter versus the second quarter, it's basically flat, down substantially from last year but basically flat.

Recent events have tended to move that a little bit.

Okay.

Thanks for the color.

Thank you.

Mike Mayo, CLSA.

Hi.

First, just a clarification.

The new asset manager that you bought, Cutwater Asset Management, you said they'll be working with Insight.

Will that be a new Investment Management boutique or will it be folded into an existing one?

Mike, it's going to be a new boutique as part of our overall enterprise.

It's Cutwater.

Yes.

Okay.

Then just my main question for the investor day on October 28, which I'll ask now.

I'm guessing we'll get a bigger answer.

Is if you look at the servicing fees for this year relative to assets under custody and you look at that ratio over time, it's one of the lowest levels that it's been, if you go back 10, 15, even 20 years, and that's despite additional market share by BNY Mellon especially but by all of the largest players.

So why don't you have better pricing given increases in market share over time and given all the scale benefits that you guys talk about?

Mike, I think this is -- this quarter is a good example where we actually saw the fees rise faster than the assets under custody, so some of our other services are to quote, value added services, like collateral and some of the other things are starting to kick in.

This is a good example this quarter.

I can't promise every quarter, but this is a good quarter where we actually are seeing the fee increase and some of the pricing discipline we are putting in place around the transactions and clients that we do business with are starting to pay off.

Assets under custody were up 3%, asset servicing fees were up 6% for the quarter, so we're trying to accomplish exactly what you are suggesting.

Looking ahead, this is a preview of October 28, but the main reasons you think that might continue would be what?

Well again, some of the collateral services, some of the value added propositions we are offering our clients are fee-based irrespective of assets under custody and that's what we're trying to drive.

Okay.

Alright.

Thank you.

Thanks, Mike.

Ashley Serrao, Credit Suisse.

Good morning.

I had a two-part question on interest rates.

The first, how are you thinking about the current reinvestment environment?

What are your reinvestment yields look like?

I was hoping you could contrast US versus Europe, given the very different rate dynamics?

The second, given the recent move down in the 10-year and long-term rates, how should we thinking about pension costs in the next year?

Sure, Ashley.

Couple of things.

In terms of reinvestment, typically what we model is we look at the market and the forward rate curve and we estimate around that.

We'll also model whether rates are just flat, that they don't change.

Given their extraordinarily low levels, we don't typically model them going down a lot more, but we obviously do sensitize to that as well.

When we look forward, we are assuming that we will reinvest and when we show our sensitivity in our 10-Q, we will assume that we're reinvesting at the existing market levels.

In terms of the discount rate and the lower interest rates and the lower 10-year, the discount rate is a corporate credit discount rate, so it's not quite as severe as the drop that you speak to in the 10-year.

But it is down a bit from where we saw it last year and obviously that means the pension obligation would increase and the cost associated with the pension expense would also increase.

We give estimates in our annual report on what those numbers might look like depending on what that discount rate is, so you need to get a good handle around the discount rate.

Thanks for taking my question.

Thanks, Ashley.

Adam Beatty, Bank of America Merrill Lynch.

Thank you and good morning.

Just one question, I want to get your thoughts around trends in LDI?

I noticed there were some outflows last quarter, inflows this quarter.

Given some of the recent market volatility, has there been anything about a rush to the exits on behalf of some clients who may have hesitated for one reason or another?

How do you see it tracking versus pension plan funded status?

Maybe any quick color on the strategic role and the capabilities of Cutwater versus what Insight already had?

Sure.

That's a great question.

The LDI business still has very robust pipelines as pensions, broadly, are looking to de-risk.

In fact, if you remember last quarter, we actually had one sizable outflow.

Net of that we had pretty meaningful inflows, so the business is robust, the pipelines are strong.

I would tell you that it's obviously been a very big business for us in the UK specifically and around the world generally, but we see the US opportunity really continuing to expand.

Your question about how are pensions, thinking about current environment?

When we saw the 10-year push 3% yield here in the US last time and the stock market was doing really well, funded status levels actually got to a point where more people were interested in it.

I think the general view was rates were going to continue to move higher.

There were, obviously, two sides to every market.

I think there was a view that maybe rates would continue to move up and that funded status would even get better and that the LDI move in a pension plan might become even more attractive.

This last move down, I think, has made people more thoughtful about looking at the opportunity to de-risk their plan and to take advantage of it when it makes sense for them to do it.

We do think that people will -- people who have made the decision, pension plans have made the decision to de-risk their plan will be more active in doing so as the opportunity for that exists.

Another thing I would tell you, just to extend that point.

The skills involved in doing LDI, and every plan is different and in the UK you have inflation component and that can be more complicated than some of the plans in the US.

But the skills involved really are about being able to create a solution around a liability, so buying assets against a matched liability.

That looks a lot like and is, actually, absolute return investing, generating risk-adjusted returns for clients.

I would tell you that the skills there really can feed two other large growth opportunities for us.

One is around the retirement space for individuals, so a lot of the techniques and capabilities are quite similar for creating retirement solutions for individual investors.

Then also, there continues to be a lot of interest, both on the institutional and broader investor front, for absolute return strategies that look like these strategies.

Absolute return, real return investing that you hear a lot about is going to leverage those same capabilities.

Cutwater brings a much deeper capability in US fixed-income markets.

We again -- we have LDI businesses inside Standish and Mellon Capital as well, but Insight as now the largest LDI provider in the world, continuously winning awards for the great capabilities they have.

Being able to have the intellectual capital sharing from our Insight team with our Cutwater extended capabilities in that new boutique, it really is going to position us quite well, we think, to continue to benefit from pension de-risking trends.

Appreciate the detail.

Thank you.

Brian Bedell, Deutsche Bank.

Hi.

Good morning, folks.

Hi, Brian.

Can you talk a little bit, maybe expand a little bit on the collateral management business?

You say you're obviously getting some traction there now.

If you could opine a little bit about some of the discussions on tri-party repo in the marketplace, including potential centralized clearing of that?

I don't know if there's any way to frame that contributions, we model that and that grows for you over time.

Is that something you're thinking about maybe starting to disclose in terms of the actual revenues as opposed to just the balances?

I'll stop there and I'll ask another one after that.

Sure.

I'll start with part of that.

The collateral services, I think we said in our commentary that the traction we're seeing is really on the optimization and the segregation side of it.

We're beginning to see the early signs of the quote the transformation, where someone has the wrong collateral in the wrong place.

Also, as more and more as transactions are required to be collateralized all around the world, there's more increasing activity.

It has been slower over the last year than we thought, but it's now picking up pace and it's showing up in our numbers and some of our growth rates.

That's one of the contributors to the solid investment services fees growth for the quarter.

Tri-party repo and tri-party repo reform, certainly the technology expense that we put into that is largely behind us.

We have a couple more waves to complete, but they're really very technical in nature.

Generally, as you can see, our tri-party balances are going up.

There probably shrinking in the US and growing outside the US.

The dealers in the US are getting smaller in their positions but it's being taken up by the secondary dealers and the non-US players.

It's a global business for us, not only in tri-party but collateral services broadly.

So, we are actually quite encouraged for the potential growth rates of the business.

Your last point or question -- should we give more clarity around it?

That's something we're thinking about, but, to be continued, as they say.

Todd, I don't know if you want to -- or Kurt?

Kurt, do you want to add anything to -- ?

No.

Maybe just, Brian, a little color of what some of the activities that are really driving the growth.

It's really the equity securities financing that's going on around the globe is one piece of that puzzle.

The other is, is that the collateralization of things like ETFs that need collateral underneath them.

Third is really the OTC market having to be now collateralized and segregated.

We're a natural place for that to happen between two parties.

Lastly, we're helping the CCPs, around the globe, in segregation capabilities whether it be providing our technology, our know-how or being a custodian on behalf of some of those segregation activities.

Really, those are the underlying drivers to the growth that we've seen over the last year and even a little longer.

Brian, it's probably also worth noting that the FSB put out a proposal this week around required minimum margins for transactions done with the banking system.

At this point -- I don't know, Kurt, if you want to comment on that?

We don't really see that having a tremendous effect.

It will take a little bit of leverage out of the market, but we don't see it either as a positive or a negative at this point.

The one thing it will drive is people have got to be smarter about their collateral and how to optimize it and make sure it's in the right place to reduce the capital costs associated with, the margin costs associated with it.

That's where I think our technology and algorithms are a great vehicle for being able to do that.

We've always said that our benefit to the marketplace is really our technology, not the margining that we do.

If it's a standard margin across the world, we don't see any impact to us in terms of the strength of our business model.

We lead with technology and algorithms and solutions.

Brian, in response to the disclosure, we have components of this as in net interest income and the securities finance, some portions of it's in our securities lending activity, some of it's in our asset servicing fees.

The tri-party itself, the custodial function that we show there, it's not a huge number.

It would be a bit odd for us to break out something like that.

Right.

It's all over the place I think.

Maybe talk it about investor day a little bit more deeply would help, since it's such a good growth area.

That's helpful.

Then, just two tiny clarifications.

I think, Todd, did you say the tax rate was 25% to 27% or did you say 27%?

No, I meant is a 27%.

I slipped.

I'd like it to be 25%.

(laughter) Yes, that would always be good.

Then, just if you can confirm the corporate trust runoff, is that still an 18-month drag on the fee revenues?

I just wanted to squeeze in one there on the money in motion on that active income side?

BlackRock said they thought they would gain about something in the tens of billions over about a year or so in terms of market share.

Maybe, Curtis, if you could opine on -- ?

We'll let you -- maybe all of these follow ups.

We're trying to restrict it to one follow up.

I'm sorry.

Okay.

I think the first question was related to corporate trust.

I would say that that's consistent.

We feel pretty confident that that's starting to slow and will turn over that time period.

Then I will turn the other one over to Curtis.

Yes.

Absolutely.

They're clearly money in motion, as you pointed out.

We've already seen it.

We have both funded wins and to be funded wins, as well as verbal commitments that we're seeing both in the US and beginning to happen globally as well.

We do think this is something that's going to play out over time.

A lot of commotion right now, but we actually think it will be sustained and do think that money in motion is always to our benefit.

I will tell you that we feel very well positioned here, both because we have strong performance, an array of very deep capabilities and very importantly a tremendous amount of capacity.

A lot of people who are thinking about whether they should put their own money in motion are evaluating just how large any centralized investment team can be.

Because our multi-boutique model is perfectly suited for those people who are looking for deep capabilities but not too big.

That is a big part of our focus.

Thank you very much.

Thanks, Brian.

Geoffrey Elliott, Autonomous Research.

Hello there.

You mentioned the decline in the large broker's matched books.

What do think is behind that?

Is it this daily reporting of the Form FR 2052 to the fed?

Do you think that's what prompted them to bring down the matched books or do you think it's broader?

I think it's very simple.

You've got supplemental leverage ratio and cost of capital being applied against this, and the cost of financing is significantly increased.

The cost of them to carry that matched book is much greater than what it once was.

Geoff, the other thing I would add to that is the leverage ratio even before you get into the SLR, the leverage ratio could be a constraining factor in somebody's CCAR analysis so that the very low yielding, very low return treasury type of repo really doesn't make sense for them to continue to hold in a matched book if it's going to put pressure on their CCAR performance.

Then just one quick bit of clarification.

You mentioned flat expenses for the full year.

What's the base we should be looking at for that?

Should we be taking out any of the one-offs in year to date 2014?

The way we disclose operating expenses it excludes M&I litigation and restructuring.

That's what I mean by flat operating expenses, so on a year-over-year basis we'd expect those to be flat.

Great.

Thank you very much.

Thanks, Geoff.

Thank you, Geoff.

Gerard Cassidy, RBC.

Thank you.

Good morning.

Todd, you mentioned that you extended out the duration of the securities portfolio with a change in strategy.

How far out is that duration or how far out are you willing to go with the rate environment the way it is?

Not much, Gerard.

We're bold when were buying 2- and 3-year types of securities, so the duration of that portfolio would have just inched up a little bit.

The contraction in interest rates that we've seen on the securities that have negative convexity has probably brought that duration back to flat over the past few days, actually.

Where there's a huge opportunity cost for us to do that, and we don't think that getting a little bit of current income at that kind of an opportunity cost makes a heck of a lot of sense right now.

Okay.

Thank you.

Then on an operating expense side, the core expenses you guys have done an admirable job in keeping that down.

Can you share with us, from a regulatory cost standpoint, what -- I don't know if you want to give us a dollar amount, but what percentage of your operating costs would you define as regulatory related today versus three or four years ago?

Obviously, it's gone up, I'm just trying to frame out how much has it gone up?

Gerard, it's a substantial number.

It's hard to tease out with any real precision.

Because you might have some areas, for example, that have gotten more efficient but they've had to take on a lot more regulatory.

So we can certainly look at projects and the costs associated with executing projects, whether it's compliance with the LCR or the new Basel standards, the resolution and recovery fact and so forth.

When we look at some of our key functions, though, we are seeing substantial rises.

We also had indicated that specifically in our tri-party reform efforts, that our costs in operating that business went up as much as $80 million for all of the broker dealer and tri-party clearance business.

We have not reported anything more specific than that, but I would say it is substantial.

That $80 million is just one example for one narrow business.

You can project that across all of our businesses and put a multiplier factor on that and it's a big number.

Would you guys say the regulatory costs our cresting?

Obviously, there's been a big ramp over the last five years but are we near a peak where they'll just stabilize or no this still just an onward and upward number?

Gerard, the statement that we've made is we don't think that the rate of increase is increasing.

I wouldn't say that it's necessarily cresting.

We are still seeing -- we have new items coming on.

You have the NSFR that we are going to eventually have to report.

There's going to be more work around resolution and recovery planning, so you have a number of new items that we face.

We're putting some things behind us.

Some things are still in the developmental and so there are some things that we'll probably see in the future.

It's hard to project if there might be additional, so that's what we know.

It seems like our spend rate is stabilizing.

The growth rate's not nearly as significant as it was, but it's on a bigger basis.

Thank you.

I appreciate the color.

Thanks, Gerard.

Jim Mitchell, Buckingham Research.

Hey.

Good morning.

Morning.

Just a quick question on the asset management business.

I mean LDI has seen some good flows, but if you look at the equity side of the equation you've had net outflows for the last four quarters.

Is that a performance thing or can you just help us think through the flows on the equity side?

Yes.

Absolutely.

I'd say there are a couple things going on there.

One of them is we absolutely saw rebalancing.

As you saw at the end of last year, markets have done well.

A lot of the activity there was for clients who had come to us and invested when the equity markets were at lower valuations and were taking money off the table.

Through this year, it's been a continuation of that.

There has not been any significant outflow from any one place.

Again, we have an array of equity invested firms and each of them have experienced some level of outflow across some of their product offerings.

Performance is always going to be differentiated across our entire platform and where performance has been on the softer side, flows have absolutely been more in those areas.

There is absolutely some linkage when a client is taking money out of the equity market that they think about what performance has been.

There is some linkage but there's nothing that I would say is systemic in any one place.

I will tell you that where we -- one of the things that a number of our firms do is focus a lot on generating returns against the risk that they're taking, so very focused on Sharpe Ratio and also on managing against downside scenarios.

In the last month, some of those strategies that might have lagged a bit during the past year or so have actually done exceedingly well.

That's the broad story.

Has it been mostly concentrated in institutional or across both retail and institutional?

Because of the size of institutional, it's much more institutional.

Right.

Okay.

Great.

Thanks.

Alex Blostein, Goldman Sachs.

Thanks.

Sorry for a follow up here, a quick numbers question.

Todd, just to double check on the expense comment you made.

It looks like if you take your core number last year and you're assume kind of the same and back into the fourth quarter you got a meaningful step up closer to like $2.9 billion run rate versus like a $2.6 million and change you've been doing over the course of the year.

Is that the right way to think about it and if so what essentially would cause the step up in the fourth quarter?

That sounds a little bit high, Alex.

Take a little sharper look at it.

We are excluding M&I, restructuring and litigation.

So you're saying $2.6 million, $2.7 million is still the number, essentially, for the next quarter?

I would expect -- again, we have indicated that we would expected it to increase from the third quarter for all of the seasonal factors that I mentioned.

Important, for example, DR revenue doesn't have a lot of expense with it.

It's going to be likely, but not all of that will be replaced with lower margin business.

That will be one of the drivers that you have to take into consideration.

The other driver is that we have quite a few of our business development conferences and so forth in the fourth quarter and that will step up.

Also, our consulting and legal expenses, we would expect to be higher in the fourth quarter, so making adjustments for those you will see them up but in aggregate for the full year, I think you'll see it flat, maybe a little bit down.

Yes, and, Alex, just adding, I think we have a line item in the statements for you where the third quarter of last year was $2.682 million versus the third quarter of this year at $2.673 million.

That's the way we look at it in terms of the core operating expense of the Company was actually down slightly year over year, and we want to try to hold the expenses flat for the entire year.

Got it.

Alright.

Thanks, we can follow up offline.

Okay.

Thanks, Alex.

Ashley Serrao, Credit Suisse.

Hi, guys.

I just wanted to get back in and just ask you a broader, bigger picture question.

Given that your influence in the fixed income markets, I was just hoping you could share some color on any of the liquidity challenges or investment opportunities you are seeing out there today.

There's not a whole lot of investment opportunities in a very low interest rate environment and a negative interest rate environment in Europe, but the liquidity challenge is are -- Todd cited it earlier.

You look at money market funds trying to find places to invest when the dealer book shrinking, you've got a reverse repo market that has a demand much greater than the $300 billion cap.

The demand was $407 billion at the end of the third quarter.

I suspect the demand is going to be even higher than that in the fourth quarter.

You have, sort of, tectonic plates working against each other.

The dealers, the dealer books, their balance sheets are shrinking by design for capital and cost purposes and the liquidity that's in the system is even higher.

There's a lot of search going on for some place to put the liquidity and get some yield and it's a really hard equation right now.

Ashley, it's Curtis.

I would add there's been a lot of chatter about the market liquidity as a result of the change in regulation changing repo markets.

I do think that there is nervousness among market participants about the idea that if there were a rush out of asset classes, that we would see limited liquidity.

We saw a little bit of that I think over the past couple weeks, where markets were more volatile and there were some balance of illiquidity.

One of the things that's interesting about that period is it was while interest rates were falling and so generally the valuations in fixed income markets in aggregate were not as stressed.

I think that periods of illiquidity in a rising rate environment are the ones where a lot of the scenarios get drawn out.

That's actually -- if you sit here at BNY Mellon and you watch the entire evolution of market structure from both an investment services and an investment management perspective, we really do believe that the electronic platforms are being put in place and that all of the work around collateral for a lot of transactions are going to occur are critical and we think it's actually a pretty big opportunity for us to help re-create the pools of liquidity that the markets are going to need, whatever market environment we're in.

Kurt, I don't know if you want to -- ?

Great.

Thank you, everybody, for dialing in.

Just, again, to summarize, we're encouraged by our results in the third quarter.

However, we strongly believe we can in fact improve our financial performance even greater than what's reflected in this quarter.

We'll be discussing more of that and our upside on investor day later this month.

Look forward to talking you all and seeing you all in person at the end of the month.

Just as a reminder if you have additional questions please follow up with Izzy Dawood.

Thank you very much for joining us today.

Thank you.

If there are any additional questions or comments you may call Mr. Izzy Dawood at 212-635-1850.

Thank you, ladies and gentlemen.

This concludes today's conference call.

Thank you for participating.