Good morning and welcome to State Street Corporation's Third Quarter of 2018 Earnings Conference Call and Webcast. Today's discussion is being broadcast live on State Street’s website at investors.statestreet.com. This conference call is also being recorded for replay. State Street's conference call is copyrighted and all rights are reserved. This call may not be recorded for rebroadcast or redistribution in whole or in part without the express written authorization from State Street Corporation. The only authorized broadcast of this call will be housed on the State Street’s website. Now, I would like to introduce Ilene Fiszel Bieler, Global Head of Investor Relations at State Street. Ma'am, please go ahead.

Thank you, Laura. Good morning and thank you all for joining us. On our call today, our Chairman and CEO, Jay Hooley will speak first, then Eric Aboaf, our CFO will take you through our third quarter 2018 earnings slide presentation, which is available for download in the Investor Relations section of our website, investors. statestreet.com. Afterwards, Ron O'Hanley, our President and COO, will join Jay and Eric and we'll be happy to take questions. During the Q&A, please limit yourself to two questions and then re-queue. Before we get started, I would like to remind you that today’s presentation will include adjusted basis and other measures presented on a non-GAAP basis. Reconciliations of these non-GAAP measures to the most directly comparable GAAP or regulatory measure are available in the appendix to our 3Q 2018 slide presentation. In addition, today’s presentation will contain forward-looking statements. Actual results may vary materially from those statements due to a variety of important factors such as those factors referenced in our discussion today. Our forward-looking statements speak only as of today and we disclaim any obligation to update them even if our views change. Now, let me turn it over to Jay.

Thanks Ilene, and good morning, everyone. As you've seen, we announced our third quarter financial results this morning. Our third quarter and year-to-date results reflect solid performance across our businesses as we continue to win new business and invest in the future, while reducing legacy costs as we advance our digital transformation. Despite a higher than average share count, third quarter earnings included substantial EPS growth and increased return on equity compared to 3Q 2017. Assets under custody and administration rose to record levels of $34 trillion, a 6% increase year-on-year driven by strength in equity markets and new business wins. We achieve new asset servicing mandates of approximately $300 billion during the quarter, driven by two substantial wins of approximately $90 billion each from the large European client and a top insurance and investment management company. Importantly, year-to-date we've now seen a number of sizable new client business wins, totaling $1.8 trillion and our new business pipeline opportunities remain robust across the franchise, giving us continued confidence about the differentiation in the marketplace from the service and solutions standpoint. Assets under management at State Street Global Advisors were at record levels of $2.8 trillion at the end of the third quarter, up 5% year-on-year and 3% sequentially, reflecting strength in equity markets and ETF inflows driven by the continued success of our low cost product launch late last year and institutional inflows. These positive growth trends within our core franchise were partially offset by market and industry headwinds, leading to overall fee revenue increasing only 2% year-over-year. I'm particularly pleased with our ability to drive costs out of our core business and adapt quickly to the revenue environment we experienced this quarter. We actively brought down expenses for two successive quarters. Beacon continues to deliver significant savings and we…

Thank you, Jay and good morning, everyone. Please turn to Slide 4, where you will find our quarterly results as well as a few notable items from prior quarters. As a reminder, 2Q 2018 include a repositioning charge of $77 million and 3Q 2017 included $26 million gain related to the sale of an equity trading platform, as well as 33 million in restructuring costs. I'll also remind you that 3Q 2018 results include the impact of the new revenue recognition accounting standard. This increased both fee and total expense by $70 million year-over-year but is EBIT neutral. Now let me move to Slide 5, where I will review the quarterly results as well as the year-to-date highlights. Third quarter 2018 EPS increased to a $1.87, up 13% relative to a year ago. ROE was 14%, up a full percentage point and pre-tax margin increased half a point as compared to prior year. 3Q 2018 results reflect a disappointing fee revenue environment, largely offset by strength in net interest income and tighter expense control. We achieved positive operating leverage of 80 basis points compared to 3Q 2017. Fee operating leverage, however was negatively impacted by lower than expected fee revenue, which I will touch on shortly. Given the soft fee revenue environment, we intervened on expenses, excluding the impact from revenue recognition and the prior year restructuring charge, we held expense growth to just 1% as compared to last year. Sequentially, we actively flex expenses downwards. Last quarter I told you we would keep second half expenses flat to first half. In 3Q we did just that. Expense control is a key management priority as we navigate the quarterly revenue environment. We are carefully investing in product differentiation that continues to drive new business wins while reducing legacy costs. On…

Thanks Eric. And Laura we're now - if you would open-up the call to questions we are available.

[Operator Instructions] And our first question comes from Glenn Schorr of Evercore ISI.

A couple of quick ones on the securities portfolio I see, A) the duration extends a little bit I think; B) the yield on the securities book was flat, and C) it now has $1 billion unrealized loss position which I think it's just expansion of the mortgage book but could you mind commenting on those three things?

Maybe in reverse order, the OCI position is just one that moves in firstly with rates and so as we have seen the upward rate environment that comes through as a mark on the balance sheet. I think it's within good set of balance of that's - that was to be expected. In terms of the investment portfolio, I think as we described in first quarter and second quarter we continue to remix that portfolio. We have been gently shifting out of credit and into sort of more classic HQLA securities. Though some movements of that this quarter between ABS and Muni's and so forth which resulted in relatively flat yield. The big piece that you have to remember is that we've added and continued to add international foreign debt securities, right German bonds and British gills and that kind of high-grade sovereign. As we do that we do less of the FX swaps back to the U.S. And so our FX swap cost actually came down by nearly $35 million this quarter. And so what you actually see is you see relatively stable yields in the portfolio in aggregate. But if you look down on the interest-bearing liability line for non-U.S. domicile deposits, you see reduced interest expense because we have less of that FX swaps. So just keep in mind that that the FX played through both on the investment portfolios, on the asset side and the liability side as yet read through.

And then there's the further migration at of non-U.S. deposits and it looks like U.S. deposits are up. It also, there is a big drop in the yield paid in the non-U.S. deposits. So is that you purposely migrating those deposits via pricing?

No. This has less to do with rate than just the movement of the domicile from deposits. If you remember, we like many banks had had deposits in the Cayman branches and other, what I'll call offshore but U.S. related areas. Those were always, those were typically U.S. dollar deposits but were classified by the regulatory reporting standards as non U.S. domiciled. So we effectively did is we've closed down that program, it's no longer necessary. It's one of those legacy programs that we and other banks have had. So what's happened is the U.S. deposits which are paid, U.S. interest rates which tend to be higher than foreign deposits interest rates have actually moved out of the non-U.S. mining so the U.S. line which is what brings the non-U.S. line down sequentially and then it just blends into U.S. line. At this point we have made I think two steps of a change of about I want to say almost $20 billion that we have moved. It's now - those moves are completed. And so on a go-forward basis the account should be a little cleaner for you to read through.

Our next question is from Brennan Hawken of UBS.

First question just wanted to follow up Eric on the fourth quarter indication on servicing fees. You had indicated that you expected them to be flat with this third quarter. So I guess the question is, is that based upon the current quarter-to-date action that we see in some of the markets because there is some been some continued EM weakness and I know that's a headwind for you. So does it consider those dynamics? And do you just think that it will be offset by improved volume trends? Or can you give us a little bit more there please?

Yes. I think when you look quarter-to-quarter it's always - it's a set of small moves and rounding. So we continue to see negative flows in all the public data, whether it's EM but also in the other international markets which will be a bit of a headwind. We've got nearly all of the BlackRock transaction out. We've got I said 10 in the 1Q to 2Q 2020 from 2Q to 3Q. We got $5 more, so that will get to a $35 million run rate so that's nearly finished up. And then - there’s some installations coming through as the pipeline plays out. And then the open question will be what happens to market levels because you know how that plays through our fee structure. So we think it's going to be flattish. I think there is - it's rough estimate for now and kind of an assemblage of those - the composites of those move.

So it does consider some of that weakness thank you for clarifying that. Second question being, you previously had indicated an expectation of the fee operating leverage, I want to say that the bottom end of the range was positive 75 bps for the full year. I don't think you included those comments in your prepared remarks. Is there an update to that outlook? How should we think about that? I'm guessing it would be pretty hard to reach that kind of fee operating leverage for the full year, given the first nine months trend?

Yes Brendan, it's Eric. And I think you've called it right. I gave outlook here. I needed to give outlook either on the flip quarter basis or on a full year basis. And obviously, you guys can model out the other piece either way. But I'd just do it for our fourth quarter, just to give you the direct information. I think if you put together the composites of 1Q plus 2Q plus 3Q, yet in my fourth quarter you'll see that we have good line of sight to many of the targets that we gave in January, but I think fee operating leverage, as you described, will - it's not going to be one of them on a full year basis. That said, we are very focused on controlling what we can control and you've seen us, I think, intervene pretty significantly on expenses and we'll continue to do that as we navigate through the quarterly revenue environment. And that's probably an area, expenses in particular, where I think we will have outperformed our intentions for the year.

Our next question is from Ken Usdin of Jefferies.

Eric, can you talk a little bit about - you mentioned that in second quarter you had trimmed back on the incentive comp and then this quarter you made the additional changes to $40 million. I guess, how do we - can you help us understand, given the third quarter results and the fourth quarter outlook, how do we understand where you are in terms of incentive comp overall? Like, is it truing up relative to where the revenues have come from through, part of your fourth quarter outlook for flat expenses? How do you just generally think about, say, you've done in the past, or it's trued up at the end of the year for disappointing revenue trajectory? So just maybe you can hover through some of the moving pieces of how you expect that flat expenses in the fourth to be coming from?

So Ken, let me first describe how we and I think other banks address incentive compensation. Right? At the beginning of the year, we have estimates of where we're going to deliver in terms of revenues and expenses and other NII and total earnings and EPS. As we move through the year, right, we check to see how we are trending against those expectations. First quarter was a good quarter, generally, and there was no need to make any adjustments. And second quarter, right, as we saw that step down around flows and those industry conditions that have started to permeate through the P&L, we came to the clear realization that we weren't going to deliver at least for the first half year. And as a result, we did a year-to-date catch up on incentive compensation. And that was where $40 million, $45 million in terms of reduction in that quarter. This quarter, we've kind of kept that at the adjusted pace. So - but obviously, without the catch up, so the quarters are lumpy. And then in fourth quarter, we'll assess again where we are. But as I said, I think, we have delivered on a number of our objectives and targets that we set out for ourselves and made public, but not all of them. And every one of those targets count. In terms of line of sight into fourth quarter we - there is kind of a comp benefits and a non-comp and benefits of part two to that. Merits already paid through on comp and benefits. I think incentive compensation we kind of have some line of sight to between this quarter, but we need to kind of see how fourth quarter plays out. As you described headcount is important in particular. You remember, in second quarter we took some decisive actions and drove some management delayering right that was a result of the organizational globalization and streamlining that we took upon ourselves to do potential, and so some of that will start to play out as a benefit into fourth quarter. So that's kind of a number of puts and takes for fourth quarter if we think about the comp and benefits line. And then the non-comp and benefits is every vendor and third party spend and discretionary line. We know how we've done this quarter, we have - we reforecast and think about the actions we have taken or intend to take and that gives us some line of sight which is why we said fourth quarter would be up slightly from third quarter. But we think well controlled and deliver nicely in a year-on-year basis.

And then second one, just you mention in the slides sec bending business has been changed a little bit due to some of your balance sheet optimization. Can you just talk us through, are you through with that balance sheet optimization? And would you expect sec lending to kind of have formed a base from here? Thanks a lot.

Yes we are through with the adjustments we needed to make in the sec lending business. That one includes the Classic Agency lending and Enhanced Custody. There has been a number of regulatory rules including CCAR that affect those businesses. We had a condition upon our - of that - we had the conditional approval under CCAR. We did I think some very good work around the analysis and the reporting and the management of counter parties which did include the securities lending area. We now feel like we're complete on those. We have confidence. We are as a result well prepared for CCAR. And when we think about the work we have done, we actually feel like we have also begun to deploy the kinds of future actions or actions today and actions that we can continue in the future that can give us lift and headroom. And so we have implemented a set of additional diversification from the very largest counterparties, the next group, sometimes its U.S. international, sometimes international to U.S. We have done netting and novations that help compress the book in some ways, so you don't have the large puts and takes, but you've got netted down exposure. And then what we've done as effectively systematize many of those tools because those are kind of action tools and we've systemized those in many cases on a day-by-day and even intraday basis. And that gives us confidence that we've been able to now create headroom of which we can grow sec lending on a go-forward basis. Certainly in line with the balance sheet but our intention is that that is a continued growth area.

Our next question is from Betsy Graseck of Morgan Stanley.

Maybe you could talk a little bit about some of the expense opportunities that you see in may be in the next quarter if you can't do it specifically but over the next year or so? And not only your own benefits from Beacon that you have been generating but what do you expect to get from CRD?

Betsy, this is Jay. Let me start that what Eric would pick up. You mentioned beacon and I think that's a good place to start, because a lot of the expense actions that Eric just reference a few minutes ago are kind of tactical expense actions. I think that for strategically as we have gone through Beacon and its predecessor ITOT the people we go, the better the opportunity looks. We are standardizing activity connecting processes together eliminating human touch we do see reconciliations all of which have multiple benefits. The one you're asking about is the cost benefit. And we'll expire Beacon formerly next year but those opportunities will by no means expire. I mean there are multiyear opportunities to continue to drive greater efficiencies in this core operations around custody accounting globally and you will recall at the back-end of 2017. We reorganize the business so that we're in a better position to take advantage of systematically going at we call it a straight through processing really to reduce the human labor content and the core activities that we conduct. And we've got a long way to go before we get that to a place where we're straight through and it will have huge benefits to clients, it will have huge benefits to the cost line. So there’s plenty to do.

Betsy, this is Ron. Let me just add a little bit to what Jay said. Because I think for all the things that we've accomplished to-date, I would say that there is a second order that we can get out of it and let me be specific here. So we've been on this big push to put in place end-to-end processing and that's been enabled by a lot of the automation and changes we've done in Beacon. But there is more that can be done there. I mean, as we do some we find more. As we've stood up, and strengthen our global hubs in India, Hangzhou and Poland they've matured. And they've gotten to the point where it's less about just taking in bits of work and more about taking in whole processes. So that would be one. The second order and third order out of this is we've talked earlier about the de-layering. I would say that we're going – that we're moving into the point where we can do major flattening of the organization as you actually move these processes together. And then lastly, much of the Beacon journey and the technology journey has been about standardizing when we can. The historic core of our client base has been large asset managers. And in many cases in the past that has driven us to customization. We've now learned and what we continue to learn how to standardize as much as possible and move less to customize and more to configure and that in itself will provide more opportunities. So we see ongoing opportunities to reduce expenses without actually in fact impairing client service, but at the same time improving client service.

And how far away do you think you are from fully digital assets capability?

Let me take that Betsy because this is a journey and you can think of the glass as half full because there continues to be opportunities literally in every area. As we've globalize the business and think about somewhat Jay described as straight through processing. Those kinds of opportunities exist that are level of say accounting or custody but they also exist deep down - custody, for example, you can break down into bank loan processing, securities processing, derivative processing. And every one of those in our minds we have – we continue to find more areas as we fully globalize the organization. And so it's hard to say whether we’re in the third inning or the seventh inning. We're Red Sox fans up here so it's a - there's always the temptation to do that. But the truth is there continues to be real substantial opportunities and as we go deeper and deeper and more and more globally through the organization.

Our next question is from Alex Blostein of Goldman Sachs.

So I was hoping we could peel back the onion a little bit on what's going on in servicing fees and understanding the quarter-to-quarter dynamic is - could be pretty lumpy. But Eric you mentioned fee pressure a bit more specifically I guess in your prepared remarks. So I was wondering whether or not you guys are seeing acceleration in fee pressure within servicing from some of the asset management clients? If so kind of what's changed in the last kind of six months? And then because the active management have seen outflows for a long time so kind of what's driving incremental fee pressure? And more importantly I guess as you think about State Street servicing fees organic growth over the next kind of 12 to 24 months, what should we be thinking about taking to - into account the fee dynamics as well as kind of your comments about the pipeline?

Alex this is Jay. Let me start and Eric and probably Ron will run away and miss an important question. Now, I think the - at the very broadest level there's derisking, which really begin in the second quarter. Broad-based risking has only continued. And the way that it affects us is we talk about outflows but out - the mutual funds have been outflow - outflowing in the U.S. for a long time I'd say that step down we saw was in Europe where we have a large business mostly in the offshore centers. Last year in first quarter we had very robust inflows that went to neutral and I think that's probably a factor of Brexit and Italy and all the commotion that's going on in Europe. So that was kind of a new factor and we are - because of our success over there probably disproportionately affect I'd say broadly the EM pressure is kind of the second thing that has really put pressure on us. All that combined created lower transaction fees. So it's mostly around the broad-based derisking that has those two or three tributary factors that go with it. And I'd say Europe with the a little bit emphasis. I think the - so that's - none of that’s particularly good news. I would say if there was a silver lining at all is that in news we all see this, our clients are under considerable pressure. And that can play out in couple of ways with us. It puts pressure on our fees that we charge our clients. But in the overall scheme of things our fees aren't going to solve our client issues so relatively deminimis. So it really opens up the opportunity which is why we continue to stress the new business pipeline, the differentiation, the middle-office data GX more recently Charles River. Because our clients are continuing to come to us on an accelerated way to say help us out. Take over the middle-office help us solve the data problem. The response to Charles River was over-the-top. I mean, our clients get what's going on in the need to consolidate front-to-back processing, to extract data. So I would say all of these guys weigh in, but in the broadest context, it's the derisking and all of the things that flow from that. And the reaction from our clients is some pressure but also help us out.

Yes, what I would add to that this is Ron. Just to maybe a little bit more specificity on the flows in Europe. Mutual funds are still quite popular relative to ETFs. And Jay noted that net flows went from positive to basically neutral, but it's worth looking at the underlying component for kind of what was the in versus what was the out. With that derisking the breakout was emerging market as Jay noted and that's just a higher fee per asset for us. So that just hurts disproportionately. At some point these things reverse. We're not here to predict when, but when that does reverse, obviously we should benefit from the opposite. In terms of the client discussions that Jay talked about, client discussions for several years now have moved much away from conversations between us and the head of ops to heavily strategic conversations between us and the CEO and the CIO. And those have just accelerated for all the reasons that Jay said. And I think it's at the point now where virtually every asset management firm that hasn't done something - and by the way most haven't right. Most haven't outsourced their middle-office, most haven't moved to a platform like Charles River or Latent are talking about doing that. What Charles River has enabled us to do is just to broaden that conversation, but we're already having it. And I - we're very optimistic that this will turn into more and stronger new business as we go forward simply because our clients challenges while imposing certainly some fee pressure on us but also our future opportunities.

And I guess my second question Eric maybe around NIR. So I heard you guys still expect growth sequential in the fourth quarter, maybe talk a little bit about what you're seeing in balance sheet trends so far in Q4? I know the ending deposits were lower and then could move around of course. So what are you seeing with respect to deposits so far in the fourth quarter? And I guess longer term as we think about the trajectory for stationary deposits in the mix interest non-interest bearing how should we think about that for next kind of 12 to 24 months?

Sure, it's Eric. The deposits have been - they've just been bouncing around at about this level here and we show around $160 billion. You get - it's hard to predict the month-by-month or even near the first two weeks of a quarter because we do get these very large spikes. Remember as one of the top custodians just think about the amount of transactions that flow through our pipes. And you do see that in the end of period balance sheet relative to the average. We did have the seasonal lightness and deposits in that August time period. We heard that in the - at some of the conferences that didn't put us off. It kind of came back as expected in September. So we have these ebbs and flows and so it's hard to divine kind of for coming quarter or coming year based on those. What I would tell you is part of the reason that we felt good about our deposits and obviously we've got to see what happens with quantitative easing and fed balancing trends and so forth is we've been very engaged with our clients on deposits over the better part of the year if not year and half. And part of that is it's a natural way for them to pay us, right, or for us to serve them. And if you remember deposits is just one of the offerings we make right. While we think of it as a set of liquidity solutions we offer to our clients. Sometimes deposit, sometimes repos, sometimes money market sweeps. And each one of those has a value to our deposits and offering that cascade is actually one of the more sophisticated discussions that we've been having with our clients over the past year or so. Anyway that's a little bit color more than anything else Alex, but we feel like we've got healthy amounts of deposits. We feel like there is relative stability there. We feel like we're sharing in the economics of appropriately where clients, earn more, we earn more as the fed rates float up upwards. And to be honest, we're continuing to turn our attention to Britain, to Europe, to Asia because there are big pools of deposits there, and we like to see prevailing interest rates rising in some of those geographies. And if they can't, that could be another opportunity for us in the coming quarter or coming quarters, I should say or coming years.

Our next question is from Brian Bedell of Deutsche Bank.

May be just to go back on to the on servicing side, maybe I just wanted different angle on that. Obviously, we see the fee rate coming down, but it sounds like it's - as your saying, it's due to that mix away from EM and European mutual funds. I know to the extent that assets do shift towards passive an ETF. It's a lower -- it's a much lower fee. But I think Jay you've also said in the past the probability of those assets is comparable to mutual funds. So can you just maybe talk a little bit about if we can just continue to see pressure on the asset mix there and we see those fee rates come down, where do we see the offset on the expense line? Does that come through sort of right away or does that take some time to work its way through

Brian, it's Eric. Let me start on that. I think you've got the right couple buckets of drivers on fee rates right. The first is the mix in particular EM and even Europe is at a higher rate than the U.S. And then active funds are at a higher rate than passive. So, both of those play through. I think the other thing that is playing through in the fee rate is literally our -- the two of the largest transitions ever here. With BlackRock floating out, that was an old fee rate contract and had a stack of different products and services in their collective funds and that's obviously transitioning out. As we bring on Vanguard, we've been quite clear that we've started with the most core of the core products which is custody, right. And obviously, we always have discussions with large clients about bringing on other parts of the stack, but custody is one piece of that stack. And so we’re kind of you're seeing the offset of a stack of services versus a one service star on trillion plus in assets. So that's the other piece that's just coming through in the quarter-on-quarter. But I think in general you have the right view. So its around mix of assets, it's around mix of underlying of fund and fund types and that's playing out. And in terms of the expensive, our perspective is the reason why we're focused on margin and reason why we're focused on operating leverage and we can - operating leverage fully or fees or their different ways to - and all the ways matter, right. We're focused on driving down our cost and increasing efficiency every year, because we know that's what this business requires. And our view is if we can do that smartly and with the - in ways that help our clients, right that can be good for them and good for us.

And can you just remind me of the servicing wins to be installed in the fourth quarter and you're not including any wins that you’ll be getting the fourth quarter what would that - what would the servicing installation pipeline look like coming into 2019?

We've got that in the press release servicing business to be installed with that 465 billion. You'll see that's been - that's I think - it's quite a nice level if I go back over the last eight or nine quarters that tends to be above the level which we run, which is part of the reason why we have some confidence not only in the pipeline but some of what we see in terms of revenues in the in the coming quarters.

But the 465 is for the fourth quarter or is it into next year?

That's into next year right so sometimes clients come on quite quickly. If you remember the Vanguard kind of custodial client play through quickly and that was because it was simpler to put on the 465 will come through over several quarters. And obviously, what we're working on now is the pipeline and pushing through closing that pipeline, so we add more as we install more and that's just the natural cadence of the sales and then installation activity.

And I just listened to the last part of your fee operating leverage comments to your prior question. Can you just repeat that what you're expectations for fee operating leverage for the full year is now with the weaker fees?

Yes I said I didn't go through in detail right. I wanted to be helpful at the end of my prepared remarks and I gave you my fourth quarter outlook by area including fees. I think you can easily now calculate estimate of all of our metrics including fee operating leverage if you just add up the first three quarters on a parachute in an estimate of fourth quarter and I think what you'll see is I think we had five main targets out there as part of our January guidance. I think we've hit many of those but not all of them and I think fee operating leverage is one that where we won't achieve what we intended. But on others, like expenses with Beacon, we started off with an intention to save $150 million this year. We're at - we've said we're confident we can do to $200 million. We've actually already to $180 million after three quarters so we have some - we have quite a bit of confidence there. And then you saw we deployed another $40 million of more tactical expense reductions just this quarter, right to add to the expense management efforts. So I'd say it's - there are number of these that we're going to hit on. Some were ultimately deliver on and others that we may not, but we're focused on navigating through this environment.

Our next question is from Mike Carrier of Bank of America.

First one, just one more on the servicing side and more on the outlook, when you look at the priceline, at any context or color, on the mix of that meaning is it on the passive side, the traditional alternatives, just the assumptions. And Eric maybe just, we think about fee rates and products whether we're in risking or if we eventually get to a rerisking environment. What's the divergence on fee rates across the products that can shift things around both on the positive and negative side?

Mike, its Ron here. Let me talk about the outlook. I think the outlook is quite strong as we've said for the reasons that we've talked about it as much because of the pain that our clients are suffering. So the nature of the outlook is less about active versus passive because typically it's what we get reflects with the underlying asset manager itself is managing. But what I would say is that the outlook more often than not - the discussion is more often than not include as you'd expect custody and fund accounting, but quite frequently the middle office. And as we look back on many of the large deals we've done, roughly half of them have been middle office plus custody and accounting. And I think that reflects just the nature of these large and medium sized asset management firms saying this isn't just about am I going to shave a little bit of fee and move it over to another custodian, but more who is able to help me improve my operating model. And so that set of discussions is rich. The pipeline is strong or all the discussions are going to result in a priceline, probably not, but I think just from the sheer amount of activity we're encouraged by the outlook for the pipeline.

And Mike let me just give you some of the kind of ranges on the fee rate. Our overall fee rate it takes servicing fees divide by AUCA is about 1.6 basis points. But the range is actually quite large within that, if you think about all there because of their complexity and the spoke nature can be five, six, seven, eight bps and that's the industry standard. ETF’s are at the other edge of that can be well below - therefore half of it. But just there's a wide range mutual fund, collective funds, institutional retail are all quite different. And then the European offshore centers versus onshore centers because of the tax and accounting complexity, have you know offshore tends to be at a higher rate than onshore and offshore has been where we've had much of the flows in Europe right through the Luxembourg vehicles and the Irish vehicles which is what actually went negative in the second quarter, was dead flat in third quarter. So those are some of the - some of the maybe the ranges and the drivers and it's even when I work through and try to give guidance on something like servicing fee for fourth quarter, I mean, there's a number of different considerations and which is why the results can move even over the course of a couple of months.

And then Eric, just real quick on tax was little lower I don't know if you mentioned that but just on the outlook. And then on the expenses, you guys mentioned were you on Beacon and then you mentioned the $40 million and just wanted to get some clarity on is that an addition? And when you see these like revenue pressures like where are you guys in terms of the expense base being maybe more variable versus in the past?

Let me add to those in order first on taxes then on expenses. On taxes, we had some discrete items, but the largest one was a true up on the year-end 2017 net tax package. If you remember, we had a charge in the fourth quarter of $150 million. There's a lot of information that's come through some puts and takes that but we had more, more benefits than otherwise as we trued-up on depreciation R&D in some of the many nuances that you remember we're not -- we're not finalized or had come through on the rulemaking and so that true up was worth about 3.5 points on the tax rate roughly. And I think was obviously a positive this quarter. On expenses, I think you know we think about the expense opportunities as we covered earlier at a number of different levels, right. There is enormous amount of continued opportunity as we continue through Beacon and standardized and simplified and we do that at multiple levels. And sometimes, it's in the processing shop, sometimes it's in the IT shop. So there's a whole set of, I'll call it more process engineering that we continue to do there as we – as we continue from the learning's from Beacon into the next phase. I think the management delayering and simplification as Ron described is an area of continued opportunity. And I get that the fixed costs that we've got to take out fixed costs not just variable costs as we drive down the productivity curve. And then I think the areas of third-party or non-compensation's stands as you know, if our – if our clients the asset managers are under pressure and they're asking us to see how we can do a bit better for them and giving us more business as an offset. We're going back to our vendors and say look you've got to look upstream as well, and help us deliver better for our clients. And so, we're working actively whether it's you know market data vendors, custodial vendor, contractor vendors, IT vendors, I mean it just go through the long list. And I'd say, every one of those are our vendors, but they are partners to us and they need to help us deliver what we need to on our on our productivity journey.

Our next question is from Mike Mayo of Wells Fargo.

If you could help me with disconnect that I have. The first part of the decade, statutory claim victory for business OP and IT transformation. The second part of a decade is claiming success for Project Beacon which is about done. Today's press release says, quote solid performance but year-to-date pre-tax margin. It looks like its worst in class, the same as it was in 2011. You highlight some recent derisking and certainly EM hurts but for most the decade you had a lot of risk going and a lot of higher stock market. So three questions, number one, you alluded to new expense efforts. Will there be a new expense program in 2019 or in the next few years ahead? And again it's getting all the saving from Project Beacon but not showing deposit of leverage, not showing the improvement in pre-tax margin. So I guess the hope for expectation be a new expense program would lead what for the pre-tax margin? Number two, how do you guys think about governance, because we hear Jay saying things that are good solid performance, and he is the outgoing CEO. And then Ron you are the new CEO taking over next year and there seems to be a little gap, and this is one of the longest CEO transition in a while, so if you can comment on governance? And three, in terms of a strategic pivot, you highlighted Charles River partly through pivot strategically to stage three, think about a larger strategic pivot perhaps even a combination with a brokerage firm, bank or asset manager you had to deal yesterday. So what are your thoughts about expenses, governance and acquisitions? Thanks.

Mike, why don't I start that on expenses. So your specific question is, are we planning to employ a new expense program either at the end of this year in 2019? And the answer is at this point, I don't think we need to, because there is intense focus on expenses now and much of the programs you cited in the past have provided – one, they provided savings; two, they provided foundation for the next one. And I look forward and the rest of us look forward and see lots of opportunity to continue to manage our expenses, and to do that in concert with improving our product and improving outcomes for clients. So, I just don't see that we actually have to announce a separate program because I would argue that that's what we're doing. The other thing, Mike, we want to be clear on here and I think we've said this in our materials is we do continue to invest. And we're investing one to continue to get more of that expense out and to make sure it's enduring expense reduction, so that it's not just belt-tightening, but that in fact we're actually getting end-to-end processing in place that we're actually getting real automation that we're getting kind of full usage out of the global hubs. And to continue to improve our offering to clients. So, I mean the easy way out of this would be I supposed to just stop investing, but we don't see that as an option given what we're trying to do to maintain competitive superiority.

Mike's, it's Eric. I'd just also emphasize that we did ITOT as multi-year program over three or four years. We've done Beacon over three are four years and have completed sooner. I think we're quite comfortable now that we have the tools I described the levels to a different expense levers. And that's naturally can be folded into an annual program and we have every intention as we've discussed this here among the three of us that in January is a natural time to tell here is how much we plan on taking out of the expense base here the areas in which we'll be doing that and here's what to expect in the coming year. And then use that as the cadence by which as we give guidance, we give guidance on revenues, on operating leverage, on NII to cover what our intentions are in a very practical and specific way on expenses. So I think you can plan on that in our January call. In terms of the metrics, I think -- I do think it's worth stepping back to the metrics. And I like how you do it over half a decade, a decade and I know you're senior of this industry for even longer. But ROE, right hit 14% this quarter, up almost two points on a year-to-date basis right? And that's ROE, that's not return on tangible common equity extra goodwill that gets reported by many of our peers, which in our case is 19%. But like classic ROE 14% for the quarter for year-to-date. Margin which I think you've got a look at both the gap margin because we do more tax advantage investing than other peers, but if you wanted to do on a normalized basis, it's in the 31% range is I think pretty healthy. And clearly, we don't have an anonymous lending book like others do which tends to make margins even wider. But I think we're quite comfortable with the margins that we have in the 30% range on a -- 31% range on an operating basis. And you'll see our GAAP margins continue to build. So I think we are very focused on driving expenses that are calibrated to revenues and we have a good strong way to continue to do that.

So, Mike, let me - this is Jay I think that was the first question. Let me pick up the second and then reach to the third. The Ron and my transition is going quite well at the end of the year. I will phase out and become Chairman and Ron will take over the CEO role. And he is well-equipped, but I think this year has given us both good transition time with clients, employees and more recently shareholders. Let me go to your CRD question. I think that we still like the space. The space being the trust and custody business because we think it has global expansion possibilities. We think that it will still grow as asset still grow, as they go from government to retirement. So the secular macro picture I think still looks pretty good to us. Having said that, this business over many decades is been a business of evolution and custodians, if you call us custodians continuing to evolve to find points of differentiation. And so - and I think we have been leaders in that whether it's been finding the international opportunity whether it was finding the ETF opportunity, whether it was being first of the hedge fund opportunity. More recently moving into the middle-office where we now have a $10 trillion plus scale business that's bridging into that data GX angle. And the next big frontier is the front-office and not just the front-office but connecting the front-office to back office. And you'd only have to be some of these conversations to realize that when you have CEOs across the table and we’ll now acknowledge this that this business has been built up overtime with huge inefficiencies in multiple systems. And they now view State Street as not only having the foresight to be there first but having the fortitude to build this front middle back-office business that will help them compete in the next decade. So I think that your point of is there more to do? Is there more dramatics to do? I think the big dramatic we just did, which is to launch into the front-office. I think that to do is to net all these things together and I think that will define how this business looks into the future.

Yes, what I would add to that Mike is that in terms of does that necessarily mean that we are going to be force to do more acquisitions or to do kind of dramatic types of corporate actions like you saw yesterday with Invesco and Oppenheimer. We don't see that need right now. With Charles River and the platform that we're building and our organic activities, we feel like we've got what we need. We can build out organically to the extent to which there is something that make sense to augment our capabilities and have the financial criteria that we would like to see will do that but we don't – we're not here saying what was us we need an acquisition.

Our next question is from Jim Mitchell of Buckingham Research.

Maybe just asking it this way on the expense question, do you think that going forward you can generate positive the operating leverage relative to organic growth?

Jim it's Eric. I think we'll have to positive fee operating leverage. It's certainly a good objective to have organic growth is hard to I think analytically – like we have to clarify the terms, because remember how this business model works that will build up over years on servicing fees, right. There is a piece of servicing fee revenues that comes from market appreciation. There's a piece that comes typically from flows and the client activity and that actually has gone negative this quarter. There is a piece from net new business and share shift as we continue to consolidate or we move up value chain and there’s always a little bit of pricing that we worked through. So there's a set of four elements. And I think our view is and – there is four elements on the fee side and then there are deposits now. And I think the deposit conversation continues to become more important because of the positions our clients are in and in ways to even remunerate us for some of the services that we provide. So I think overtime as we – we want to drive expenses down and expenses cannot grow faster than total revenues. I think that's just a fact, right. Our margins need to continue to float upwards and that's our – we have – we're all – that's going to be a very clear bar. I think there will be time-to-time where we focus on the operating leverage when we might be getting unusual benefit from NII because of the rates tailwind or when we have a downdraft in rates because you want to kind of peel that a part. But I think in more normalized times, we probably do want to focus on total operating leverage, but there is -- I'm one of those folks who believe that every measure has a purpose and a place and we should keep an eye on all of them.

Jim, I would just add to Eric's point on your organic growth question is that the other factor is consolidation amongst custodians and that continues to happen. And for the most part, we tend to - tended to be the beneficiary in that as clients are moved from multiple custodians through either to one or towards one.

And maybe a follow-up Eric on just the other expense line that dropped I think $45 million sequentially, is there anything unusual in there? Or is that just Beacon savings that might become somewhat sustainable going forward? I know you highlighted the expenses in the fourth quarter only up slightly. So is that a reason or a new kind of run rate to think about in other or how do anything unusual in there?

Yes that one bounces around a little bit. It bounces around quite a bit and there is a series of different elements there. So I just be careful about that one and I try to use kind of multi quarter view of that. There are big lumpy items like professional fees which moves around by $10 million because those been both IT and non-IT. And some of the regulatory initiatives there are large items like insurance and that -- including the FDIC insurance with a substance coming in and out and so forth. There are TNE flows through that line. And As I mentioned that one was particularly well-controlled this quarter. There is litigation that kind of -- that bumps through that line and that can make it move. That actually wasn't significant this quarter, but can make it move. So there is I think it's a one that's always going to be lumpy, but our view is there are 15 kind of sublines there at the first quarter and we've got initiatives in each of those 15. And one where there is a significant amount of I'll call non-comp and benefit spend that we can and will control.

Our next question is from Geoffrey Elliott of Autonomous.

You mentioned EM quite a few times as one of the drivers of pressure on servicing fees. I wonder if you could do anything to help quantify that help us in future, have a better feeling for how weakness in EM or strength EM is going to feed through into that line?

Geoff, its Eric. I've been wrestling with your question because in -- I think just like you'd like see it better, I'd like to find ways to disclose it better. I think if you think about our disclosures, we have good disclosures on what happens when markets appreciate or depreciate and how that affects servicing fees. And part of your question makes me think can I turn that into a disclosure on emerging markets versus developed markets. So I'm just kind of thinking it through as yet the question. I think there's a related set of disclosures that we make verbally and on our supply decks, but maybe you are encouraging us to see if we can quantify. But if flows are negative in U.S. active funds or flows are negative in emerging markets by x or sufficiently different from the average, right. How much could that mean in terms of impact on service fee growth or decline? I mean, I think that's the kind of question you're asking. So I don't have a prospective answer for you. We have that deep in our analytics. Let me just take it on as an option you see, if we can add more overtime. Because I think what you're looking for is the kind of the first order approximation of how these different trends impact us. And we'll do some work to see, if we can get some more out there and some rules of thumb knowing that fix as we've talked about today creates an enormous kind of fuzziness over those rules of thumb. But let's - we'll add a little bit of context and thought there for you.

I think that just kind of helps get away from the mechanical S&P up and MSCI World up, asset servicing fees must be up as well. And then second one on Charles River you mentioned you're going to give some more color around expectations for that at a conference later in the quarter. What are you kind of waiting for? What are you still putting together before you can come out with those numbers on how CRD is going to impact you for?

So the biggest change that you have to do besides just integrating Charles River into our systems and our close process and so forth. And we've owned it now for 18 days is we have to complete the work on the accounting 606 implementation of revenue recognition. If you recall, we as a bank did that January one of this year as did most of the other banks and asset managers and it was quite significant to them. We literally have to do that with Charles River which means you literally have pull every contract and go through every contract. Bucket it between on-premises versus cloud each of those has term or doesn't have term and how much term. There is an upfront revenue recognition. In some cases, there is an overtime in others. And so it's literally contracts - it's a manual exercise and the teams been intensely working through that. At that point, I'll be able to give you an estimate of fourth quarter revenues but I'd like to do that once and well for you. We have a rough estimates and we've had them for since the spring and summer. But I'd like to be honest, to finish that work, I'd like to close October and maybe November results under GAAP standards as opposed to private company more cash accounting that's often been done and then, share that with you. So that's the work. We've got a couple of opportunities. Certainly, by December, we'll the first week or two in December, we'll certainly do that for you. And our intention is to share with you here is the GAAP revenue estimates or range for fourth quarter here's the expenses and EBIT. And here are probably some of the metrics that will be tracking for you, right. So this is one of those where there's a pipeline, there's a beyond a pipeline, there is a set of booked - contractually booked activity. And then there is an installation period and then it turns into revenue and so it will come back with the some of the leading indicators as well. So that will be - but will do that very proactively and we'll do that obviously during the latter part of the fall here, so that everyone is well prepared as we go into the end of the year.

Our next question is from Steven Chubak of Wolfe Research.

So wanted to start off with a question on the securities portfolio. The duration is expanded for each of the past few quarters. The most recent one it was at 3.3 years. If I look at the peers set, they're actually running a little bit below too. And I'm just wondering given the market expectation for multiple rate hikes, flatter yield curve what's really driving the decision to extend the duration at this point in time? And maybe as it is just quick follow-up, how we should think about the impact that we'll have on the pace of asset yield expansion in the context of the mix of the next versus portions of the book?

Steve, it's Eric. There's lots that goes into the design of investment portfolio and I'd share with you a bit - a couple of bits of context. The first is, now we've always run a very short portfolio here in particular because it was a large opportunity in rising rates at the shorthand. And you've seen that that's been quite remunerative for us and continues to be quarter-after-quarter. So what you're seeing us do is I think effectively just starting to balance out the portfolio as rates get higher, right, because as rates went from near zero to north of 200 basis points at the front-end and north of 300 basis points in the back-end, right. At some point we have to as bankers all begin to prevent and say, when do I want lock in some of the duration? I don't want to do all in one day or one month or one quarter, but I do want to take advantage of that curve because that curve has current earnings benefits on one hand and it's an anticipation of at some point the fed stops raising rates maybe we a couple of years from now go through another business cycle and rates come down. And when rates come down you do want to have that duration in place. So look at a context on we are kind of -- we are still -- I think still I think we're still relatively short from an interest rate sensitivity perspective. And remember we have more fixed-rate deposits in most of our peers so we tend to need more fixed-rate asset. So you got to keep that in mind as you benchmark us with some of the other universals or regionals in particular. And there is question of navigating through the cycle. I think to summarize that we're actually quite pleased with the performance of the portfolio the performance of NII and NIM. And we continue to seek good upside even with this duration every rate hike is probably worth almost $10 million a quarter in the coming quarters with this level of investment positioning, and so both good earnings and good upside in our minds.

And just one follow-up for me on some of the non-interest bearing deposit commentary from earlier. You alluded to stability in that deposit base of around 160 but the non-interest bearing deposits at least end-to-end decline 20%. I know there's a lot of volatility around the end-of-period balance sheet, but just given that the share magnitude of the decline I was hoping you could speak to what drove that acceleration at the end of the quarter? And maybe what's the reasonable expectation for non-interest bearing deposits in 4Q, just so we can comfortable that that pace of decline should not continue?

Let me, kind of, tackle that from a couple of different perspectives. The first is I think the average deposits have been in this kind of 160-ish range in aggregate. I think what we have seen on a year-over-year basis than a quarter-over-quarter basis we've seen it for us and every bank has seen it. It continued I'll call it rotation out of non-interest bearing into interest bearing. And on a quarter-to-quarter basis that is 5%, so literally 2 billion of 35 billion rotates out and that from a non-interest bearing into interest bearing and that's just I think what is completely to be expected given where we are in the interest rate cycle. And I think you've seen other banks that show that. You've seen some show actually a faster rotation than that. I think we’re quite comfortable with the pace of this rotation. What's hard to perfectly forecast is what's the future pace of that’s going to be day and will it level off? I think we all believe it will level off at some point, because there are different segments who hold non-interest bearing deposits. In particular a number of the hedge funds are all terminated providers for whom we do servicing, they tend to hold non-interest bearing deposits with us probably because those are less valuable for us and other banks under the regulatory rules, and probably because that's the way to pay us for our services. And some of that is probably relatively sticky for the duration and through cycle. So, other parts of that 35 billion of non-interest bearing deposits that will just continue to gently rotate through. And what I tell you is we keep modeling it and the rotation keeps being a little less than expected. And well that doesn't provide certainty to the future it gives us some indication that the pattern here is a pattern that we can just use as a way to forecast from. So anyway hopefully that's enough color. I think deposits in particular because we're at this higher rate of portion and the cycle, right. We're trying to get higher rate finally, which is nice to see in the U. S. and because of the fed, the reversals fed easing, and the reversal of the fed done, it's always hard to forecast. And so we're just navigating through carefully and working very closely with our clients quarter-to-quarter to serve them in this function.

Just very quick follow-up. I know that you mentioned that it's difficult to forecast the deposit trajectory, but since the correlation is so high between your deposits and industry-wide excess reserves, do you feel that the reasonable proxy that we could track while also contemplating some organic growth?

I think you couldn't. I think that I have less confidence in the direct correlation to be in excess reserves in our deposits. Why? Because our deposits are the remaining kind of frictional deposits by enlarge that exists as the custodian where you got the asset manager or the pension fund or the asset owner who moved a lot of fund back and forth. They need some frictional deposits with you, so that they don't draw on their overdraft lines which they tend to be low to do. So they use it as a way to you would balance keep some funds in a checking account. And I think we've pushed off most of what I've described excess deposits that might directly correlate to the reserve. What I tried to do from a deposit forecasting perspective to be honest I look at the Fed deposit report. There is the HA report that come out weekly and then the monthly version of those. And I think there is overall deposits the banking system that were proxy for overall deposits in the banking system. Those have been inching up it was at 4% 5% for a little while. Now it's closer to 2%, 3% a year right now sometimes 1%. So that's a good proxy. And I think the question is we certainly want to grow deposits at that rate. With assets in their custody growing and new business wins part of the discussion that we're having now I think more than we've ever had before is hey as you're bring custody assets what deposits are you going to bring with you? How do you make sure that you keep right amount of deposit with us? How do we serve you well with those deposits or with repo or some of the other end? So I think as you see assets under custody grow, there should be deposits that come with those and that's another part of the modeling that I do.

Our next question is from Brian Kleinhanzl of KBW.

I just had one question. When you look at that servicing fee and I do appreciate the additional color that you gave us this quarter. But ever since Project Beacon's been launched you've had nothing but pretty much linear trend down on your asset servicing fee rate. I mean - and I get that there are some categories that do have higher fee rate, but I mean when you think about the legacy of book of business that you have why is -- why should we just not assume that that just continues to reprice lower over time?

Brian, it's Eric. Just first order though remember that since we launched Beacon right we've had a run-up in market and equity market levels right appreciation. Just think of in 2017 equity markets spike nicely 20% depending on what the time period. During that period remember what happens is then we disclosed in our queue that you don't have a linear effect on servicing fees. We described 10% up in equity markets or 10% up in fixed income markets increases servicing fee revenue between 1% and 3%. So, automatically as markets appreciate, our fee rate by definition will flow downwards right just because they aren't linear right? The fees are not linear with markets like they are in the more classic asset management industry. So I think in appreciating markets you're always going to get sum floating down. I think the -- that's kind of first order effect. The second order affects are what are interesting which is what else happens, next happens there's a little bit of fee discussions with clients, but there is more services that we continue to add as well whether it's middle-office or all for someone who we just do mutual funds and so on and so forth. And so there is a series of other effects. And then if you recall, as well, as you have ETF dominating flows in the U.S. in particular. Right? And the outflows, right, we've had, what, now two or three years of inflows into ETF and out of actives in the U.S. Right? That has a downward pressure on our fee rate as well. So, anyway, I think, there are two dominant ones. One is just market appreciation affects the math and the - kind of the swing to ETFs in the U.S. affects the math. And then there are a number of other pieces that we - that we'll influence at quarter to quarter.

Our next question is from Vivek Juneja of JPMorgan.

Couple of questions. Just shifting gears a little bit to asset management fees, seeing then that fee growth has also been a little bit slower than AUM growth. Any comments on pricing trends there?

Vivek, this is Ron. You're seeing in terms of asset management fees. You're seeing what I would describe as a pressure and in some cases accelerating pressure on asset management fees. A lot of our business, as you know, is either index or quantitative. And particularly on the index side, institutional index has been – quite a bit of fee pressure there. Investors are looking for everything they can to reduce their fees. So, yes, the pressure remains. We expect it to continue to be there. But at some level it's almost got to moderate, because you're approaching a point where people are going to – institutions are going to just start turning away from the business.

So, Ron, you don't think you're going to have to match your former institution's zero fee rate pricing on any of your ETFs?

No, it's a longer question. I believe that if you look at the rationale for why the fidelities and others are contemplating this, they're using it really more in the context of a retail environment and using it as a way to attract customers in. And also using - typically they're using those vehicles as building blocks for a bigger kind of retail SMA. So I think it's not quite as comparable to what our business is here, but your point, Vivek, is a good one and that the overall kind of fee pressure, it's another factor.

And one of the things we do continue to do right. We've got the ETF business. We also have the OCIO business. And I think part of the trends we're seeing is, there is some fee pressure on more of the legacy institutional activity. And on the other hand, if some of the barbelling and expansion of some of that OCIO business does provide some offset to that and we're also seeing that. I think, year-to-date our fee rate was relatively flat in asset management and that's - those are effects. Those kind of veiling effects are - you can see in the numbers.

And did you - normally in the third quarter, do you not see some seasonal benefit from performance fees? It didn't seem like we saw that this quarter. Am I missing something?

It depends by - we're fairly global and so it depends, kind of, on quarter-on-quarter market levels and then fund-by-fund. But remember emerging markets were down and equity is good quarter. International was down as well with only the U.S. it's kind of back here at home where it feels good, so I think there wasn’t the average to be relatively neutral this quarter.

And one more if I may on the servicing fees items, I'm sure you're getting a long call on that. But just while we're all on the topic over the - this is going back over the years, Jay, you've always talked about middle office business, providing new stickiness, which generally translates into also helping somewhat the pricing erosion. We haven't seen that obviously. I think we don't need to go into that. But given that trend, given everything that's going on, is there a reason why the CRD offering doesn't just become another free offering overtime? Just given what we've seen over now a decade in this industry?

I think its - Vivek this is Jay. I think the front-office and CRD is different. It's at the central nervous system of these asset management firms. it's a conversation with a different level of clientele than we’ve dealt with in the typical back-office, middle-office services, so I don't think it's the same. I think that the value that we see inherent in the front-office is the obvious piece, which is to create connectivity and efficiency through the middle and back, but the bigger value is we view this front-office initiative as not just the software platform, but rather a platform that can network other investments capabilities whether it's liquidity or other things into it. So, I think it's a different conversation with a different clientele and has a different value proposition.

I'd add to that, Vivek. I think that it - these are not commodities that we're talking about here. What we're talking about is working with fund managers or asset owners that act like fund managers and how do we help them add value to their investment process, how do we help them simplify their overall operation and lower their costs, so there’s a real value element tied to this that I think will enable us to keep the pricing discussion quite separate.

Our final question is from Gerard Cassidy of RBC.

Eric, you touched on a moment ago the revenues and the servicing fees with markets going up or down, the range 1% to 3% of how they are impacted. Can you exclude the net interest income revenue for a moment and just look at your total fee revenue, what percentage of total fee revenue is linked to the value of assets under custody or management. Years ago, I know it was much higher, it’s lower today but where does this sit today?

If you think about total fee revenue is where you've got servicing fees, management fees, FX fees, securities, finance fees. I think we start to get impacted by the large numbers on the averages. And so I think the disclosure we tend to do is the three in 10 out of equities, the one in 10 for fixed income. It's hard to kind of on a every quarter basis be precise about that, right? So if markets go up, but FX volatility goes down. I've got FX fees going in the opposite direction. So I'm - while it's true on average, right, which is how the disclosures are clearly made, I think the market sensitivity is a tough one to pin down to be honest. I think what we can say confidently is that most of our fees, right, are market sensitive, but they are sometimes market sensitive to market levels, to market volatility and to market flows, right? And so, as a result, if the first question is what percentage of our fees are market sensitive? I'd say, most of them are. If you'd say, well, what part of market sensitivity level flow or volatility? I'd say, it's a mix of those three and different mix of each of those three for each of the different fee lines that we report.

And then another follow-up question. I'm glad you've called out the ROE number that you guys reported since I think many investors point to the ROE as a good indication of evaluation on a price to book basis. So when I go back and look at State Street in the 1990s this company almost always reported ROEs in the high-teens and then we went into the tech boom and they actually got into the mid-20s, then following the tech before the financial crisis, they drifted down into the mid-teens. We had to step down, we all know following the financial crisis with the increased levels of capital that you're all required to carry. So there was a step function down. With your ROE now up around 120 basis points, which is one of the highest that State Street has achieved over that time period. Is it really just a matter of leverage that the ROEs are just never going to be able to get back up to high teens or is it no it's not leverage it's the structural pricing issue. And if you have to get pricing back maybe we'll see higher ROEs?

I think, Gerard, it's Eric. Let me start on that. I think I don't have the luxury that you have of being in the business for as many decades, but for the decade and half that I've been in this business both here and then as part of the universal bank, I think the single biggest change pre-crisis to post-crisis is the capital requirements and the capital requirements cover, what you'd expect a little bit of market risk, a little bit of credit risk and operational risk, right, with sort of these the core what we do and those capital requirements are not perfect, right. Many have said they’re imperfect, but they are real and are part of running a bank. I think we used to have processing houses that were not banks, most of them are banks today. And so as a result I think we are in a somewhat different zone than where we might have been a couple of decades ago. That said, if we're reaching to 14% now in ROE, if the following question you might ask as well, is there is more upside, I do think there is more upside because I think there is upside in margin, there is upside in what we do for our clients, there is upside kind of balance sheet optimization and management and so we have expectations. I think that margins will flowed up and ROE flowed up and I think what the destination maybe, it's hard to - I think that one is still open but we see upside maybe just not what maybe not what you’ve may have recalled from the 90s.

And Eric you might ask Jay about the role of our back in the 1990s. Those are always good meetings we had.

Thanks, Gerard. Laura, does that conclude the questions?

Yes, we have no further questions, sir.

All right. Thank you and thank everybody else for your attention this morning.