It has been a difficult year for the markets. How has it been for State Street?

It has been a tough year for most people. For us, however, luckily it has been like 1997-1998 in that we have been able to continue to generate very good business in the region. Due to the economic difficulties in Asia, many institutional investors are changing investment managers this year. But despite that, the bulk of our business is still custody and there are fewer and fewer players in the market. We have very good clients who continue to give us additional business. We have also been able to win new clients. We don't disclose our total assets under custody in Asia, but the growth this year has been around 12%-15%.

So given the decrease in the market value of the securities you hold, the actual growth in new business has probably been around 20%?

Something like that. And that does not yet include the integration of the Deutsche Bank custody business that State Street announced earlier this year. We have not completed that deal yet. It will probably close in late January once we have submitted the deal to the various regulatory agencies around the world.

What will the integration of that business do for State Street in Asia?

It will add another $2.2 trillion of assets to the $6 trillion of assets we already have under custody. This makes us the biggest custodian in the world. But that is not the objective. We don't want to just be the biggest custodian in the world û its not a very good strategy as you may have to lower fees so much to get a major account and that is not good for staff and shareholders and its unsustainable for the clients So we tend to be more conservative and sustainable and try to be the best custodian.

The acquisition of Deutsche Bank's custody business is an opportunity for us to strengthen our client base and boost our skills, especially in Europe and Germany. In Asia, we see a good enhancement to our local capabilities. They do have clients that we would like to have and they are about a quarter to a third of our size in this region That is a good addition to our client base.

What other plans do you have for increasing the size and scope of your business here in Asia?

Going forward demographics drive our business. Either as a custodian or as an investment manager doing brokerage, foreign exchange or securities lending, we need mass population and that is going to be in China and India. I have been spending a lot of time in China recently, working with the regulators and fund managers and providing support to the pension funds, telling them about global trends. We are setting up an office in Beijing next year. While we might not be able to participate directly yet in the mutual fund or pension fund industries, given the rapid development and huge population we see massive potential over the next 5-10 years.

What will the QFII scheme being introduced in China do for you?

QFII is very interesting. I think it will be a cornerstone for the capital markets, but I don't think it will be a big business driver or a big revenue generator for us. Some custodian banks have applied to get the QFII qualification and they want to be the first ones in the market. State Street could get a QFII by ourselves, but we do not want to be a sub-custodian. So if we have clients that want to invest in China through a QFII, we will use one of the sub custodians, such as HSBC or Standard Chartered who will be on the ground first.

But that being said, we have been talking a lot with the CSRC. They know that the money they are hoping to attract with QFII is not really coming from the sub-custodians but from the global players like big US pension funds that use a custodian who will use the sub custodian.

How do you see the securities lending side of your business developing in Asia over the next few years?

I still remember in the early 1990s, I went around with some of the major broker dealers to explain to the regulators what securities lending is all about. There was some interest in the mid 1990s but 1997 wiped that all out. Regulators did not even want to talk about it, as securities lending was seen as the scapegoat for the crisis.

But in the last two or three years I have seen a major change in perception. People now understand that in a good market you need people to go long and people to go short. Securities lending just helps people who want to go short. It also helps investment managers develop extra revenue. Now it seems that central banks like securities lending, they are doing it themselves and are pushing others to do so to. That is really helping the market development and I see securities lending being a big growth sector in the region.

You are celebrating 20 years in Asia this year. How has State Street developed in that time?

When we came to Hong Kong in 1982 it was just as a correspondent bank. It has only really been in the last 10 years in Hong Kong and Asia that we have started our core businesses of custody, investment management and foreign exchange. We have a very good story to tell for how successful we have been over the past two decades.