Andy Clark Gerald L. Hassell - Chairman, Chief Executive Officer, President of The Bank of New York, President of The Mellon Bank N A and Member of Executive Committee Thomas P. Gibbons - Vice Chairman and Chief Financial Officer Curtis Y. Arledge - Chief Executive Officer Brian T. Shea - Head of Global Operations & Technology, Head of the Broker Dealer & Advisor Services, Chief Executive Officer of Pershing Llc and President of Investment Services Timothy F. Keaney - Vice Chairman and Chief Executive Officer of Investment Services Karen B. Peetz - President

Howard Chen - Crédit Suisse AG, Research Division Betsy Graseck - Morgan Stanley, Research Division Glenn Schorr - Nomura Securities Co. Ltd., Research Division Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Alexander Blostein - Goldman Sachs Group Inc., Research Division Brian Bedell - ISI Group Inc., Research Division Josh Levin - Citigroup Inc, Research Division

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Earnings Conference Call, hosted by BNY Mellon. [Operator Instructions] Please note that this conference call or 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. Andy Clark. Mr. Clark, you may begin.

Thanks, Wendy, and welcome, everyone. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO, as well as our executive management team. Before we begin, let me remind you that our remarks today may include forward-looking statements. 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 on Page 13 of the press 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, January 16, 2013, and we will not update forward-looking statements. Our press release and earnings review are available on our website, and we will be using the earnings review to discuss our results today. Now I'd like to turn the call over to Gerald. Gerald?

Thanks, Andy, and good morning, everyone. As you saw from our release for the fourth quarter, we generated net income of $622 million and earnings per share of $0.53. Just as a reminder, we recorded $0.42 per share in the fourth quarter of last year, which included restructuring charges related to our operational excellence initiatives of $0.06 per share. Now I'm pleased to report strong growth in a number of our businesses. Investment Management had another excellent quarter, benefiting from the 13th consecutive quarter of long-term inflows and higher market values. We've had $56 billion in net long term flows over the last 12 months, which included $14 billion during the quarter. Our success in attracting new assets helped drive assets under management to a record level of $1.4 trillion. In Investment Services, Asset Servicing, Clearing and Treasury Services all saw nice growth in fee income as well. Now that being said, the market environment continues to be challenging to some of our revenue streams as volumes, volatility, interest rates and tepid capital markets all continue to trend below normalized levels. These factors resulted in a decline in revenues in our lower variable cost businesses such as Depositary Receipts, foreign exchange and net interest income. And we were able to offset the decline in these revenues with growth in investment management and other investment services businesses, but the growth occurred in those areas that have higher variable costs. So the shift in the revenue mix was the principal cause of the growth in expenses year-over-year and sequentially above the level that you might have expected. In addition, we acquired the remaining 50% interest in the West LB Asset Management joint venture, which we renamed Meriten, that brought with it a higher expense base. And finally, we had some seasonally higher…

Thanks, Gerald, and good morning, everyone. My comments will follow the quarterly earnings review, and we'll start on Page 2. Reported earnings per share were $0.53 this quarter. Our results included a $0.03 benefit related to a credit to the loan loss provision where we've seen some progress or continued progress in reducing the risk of the portfolio. It's really paying dividends. We did have a lower tax rate and some securities gains, but in the end, we don't think that they're really unusual and I'll talk about that in some detail in a minute. And there were also some seasonally higher expenses, not indicative of our core ongoing run rate. If you take all those items into account, we see this as about a $0.50 quarter. This compares with $0.42 in the year ago quarter, which as Gerald mentioned, included a negative impact of about $0.06 per share related to restructuring charges. Looking at the numbers on a year-over-year basis, total revenue was $3.6 billion. That's up 2%, while fee and other revenue was up 3%. Investment management fees were up strongly, and we had nice fee growth in Asset Servicing, Clearing and Treasury Services, and those were partially offset by declines in FX, revenue and NIR, as well as softness in Issuer Services. While the current low interest rate environment continues to negatively impact net interest revenue, it has driven a significant improvement in the value of the investment securities portfolio, and that's given us the opportunity to realize some gains there. Expenses were up 7%, but if you look at it on a core basis, which was -- that is on a core basis, which excludes amortization of intangible assets, M&I litigation, restructuring charges and some direct expenses related to Shareowner Services. As Gerald had mentioned earlier,…

Thanks, Todd. And Wendy, I think we can open it up to questions.

[Operator Instructions] Our first question today is from Howard Chen with Credit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Just throughout the commentary, you spoke a lot about the fourth quarter environment being one of which you had low client activity and low volatility. Just curious, given we had a couple idiosyncratic events, like the U.S. election and the fiscal cliff and we're into 2013 now, have you seen any meaningful changes across the business or early signs of re-risking, whether it's kind of a custodial and servicing side of the business or things like frictional deposits rolling off?

Interesting question, Howard. What we did see towards the end of the year just as we saw in August 2011 was with the physical (sic) [fiscal] cliff looming, we saw a fairly significant increase in our deposits on our balance sheet, and so we saw a run-up of $20 billion, $30 billion in our deposits. Most of that has already moved back off the balance sheet, some of which has moved into traditional money market funds, some of which appears to be going into investments. I think we're going to be facing some ways a bit of a number of cliffs. I think the debt ceiling limit is going to put another potential concern in the eyes of investors. Hopefully, we'll get through that, but we are seeing people trying to put some money to work, but still there's an enormous amount of cash sitting on the sidelines, waiting for better certainty and clarity. I think some of the investment management flows, which maybe I can ask Curtis to speak to, he's seeing some activity pick up there, showing up in some of our numbers. So maybe, Curtis, you want to just touch upon that a little bit too.

Yes, absolutely, I mean, there's been a lot discussed in the media about the flows that have been into equity funds in the first part of this year, and we have seen that and then some. I think at the end of 2012, clients broadly were waiting to see kind of how the fiscal cliff played out. And obviously, with debt ceiling and sequester and budget and other things still in front of us, there still are some uncertainties. But I think as each uncertainty gets removed, we definitely see a reason to not act all the way. And the flows that we've seen and the conversation that we're having would lead us to believe that investors, and when I say investors, I mean everything from retail, mutual fund investors to some of the world's largest sovereign wealth funds, are absolutely looking at this as an environment to begin to put money back to work. Again, I think uncertainty has dampened people's activity in terms of making a decision to invest. And as we get past each of these events, we've seen people absolutely take action, and I know other parts of our company see flows as well. Brian, I don't know if you...

Yes, Brian, maybe you want to talk about what you see on the Pershing platform on the retail side particularly.

Yes, we've only had a couple of weeks of data to monitor, but so far this year, there's a significant shift, both an increase in the inflows into mutual funds on the platform and a big shift from what was in 2012 primarily fixed income-oriented funds to more of a balance. And so you're seeing a big growth in equity mutual fund inflows, at least for the first couple of weeks. So hard to tell if that's a long term trend yet, but definitely a positive sign. Howard Chen - Crédit Suisse AG, Research Division: Great. That's really helpful. And then Todd, you provided some near-term outlook for spread revenues. Just putting aside that outsized deposited movement that we just spoke about for a minute, can you just discuss the reinvestment environment for the securities book as you see it? I mean, we've clearly seen some movement on the longer end of the curve, but not a lot on the shorter end, where I think, in my opinion, historically has mattered more for you guys.

Yes, I think that's a good observation, Howard. The short end of the curve is more important at this point because the duration of our liabilities is more better matched there. When you look through the course of the year, even in a quarter, the decline that we've seen in the net interest margin is a reflection of 2 things, one is spreads and the other is balances, and it's about 50-50, and so we don't see the spread environment in the short end improving. In fact, we've pretty much gone through the repricing that you would have expected with the resets in the lower LIBOR rates. So it's a headwind, and we expect more of the same. As we had indicated, we're not expecting a better environment in 2013. We're expecting more of the same. We've got a couple of pretty tough punches in 2012 when the ECB eliminated the credit on excess reserves, as well as QE3, which dragged down mortgages, as well as some of the short end of the curve. So hopefully, we won't see those kind of events again in 2013, but we don't expect a lot of improvement. Howard Chen - Crédit Suisse AG, Research Division: Fantastic. And then final one for me, just on capital return. Todd, you mentioned the capital ratios continuing to grow and just continuing to plug along in the buyback. But on the near-term, the fourth quarter, did the buyback slow down due to timing of year or potentially the Meriten acquisition or something else? And then do you have any more overall [ph] thoughts on CCAR and 2013 as you enter the year with really strong Basel I and Basel III ratios?

Yes. At the end of 2012, as Gerald had mentioned, we saw a pretty sharp spike in our balances and most of that spike has since whittled away. But when we saw that, we actually saw a little bit of -- what could have been a little bit of pressure on our leverage ratio, and we thought it was on our interest to hold back on about $100 million or so of buybacks that we probably could have done to make sure that we had a strong leverage ratio and a strong CCAR that we could present for 2013. So we didn't want it to interfere at all with our 2013 efforts.

Our next question is from Betsy Graseck with Morgan Stanley.

Two questions, one on the expense ratio. Todd, you mentioned that the expenses reflect the revenue profile that you have right now. Should I take that to mean that we're -- we should anticipate a higher expense ratio going forward until we see some rate hikes? Or that there's going to be another round of efforts on trying to lower the expense ratio? Or is this about as low as it can go?

Yes -- no, I think mix will be key to it, Betsy, and the fourth quarter was particularly soft for DRs. So if you just imagine, $100 million with very little variable expense from quarter-to-quarter. So it's going to be the revenue mix and DRs was the noisiest component of that revenue mix. So we had expected to improve a little bit as the revenue mix gets more normal and just some of the seasonal impact. So I think in your model, you will have to average that out a little bit better. We probably should have given you a little clearer guidance on that...

Okay. And you are running ahead of your expense programs in terms of targeted improvement in the expenses?

We are -- yes, we're slightly ahead of where we would have expected to be. The cost are slightly less to get there, and the reason for that largely is because we allocated a lot of those costs in a restructuring charge against a gain that we took on the sale of a property.

Right, okay. And then from here, how should we think about the benefit of the program on earnings?

I think it's going to be consistent with what we have indicated in the past. Effectively, what the operational expense initiatives are doing for us is they're offsetting some of the growth related to pension, related to other benefits expenses, related to merit increases and some slight inflation in our other operating expenses. So those are matching themselves off. So in order to generate operating leverage, it's pretty hard if we don't show a little bit of growth outside of that to generate a whole lot of operating leverage. If we can generate 2% or 3% or 4% of revenue growth, then we'll -- then we can see some operating leverage. But again, we want you to be mindful of the revenue mix in that. So if NIR is flat and FX is flat and we're seeing in the lower margin business the revenue growth, and you're going -- then the operating leverage is going to be more challenging.

Got it. And then second question is on the capital ratio and you mentioned that part of the reason for the improvement this quarter was the lower RWA. Could you describe what's backing that? And I guess I just -- the follow-up on that is are you as able to pay out against lower RWAs as you are against earnings accreted improvements in the capital ratio?

Yes, I mean, a couple of questions there. The reason for the little improvement in the Basel III Tier 1 common ratio, the numerator accounted for about 10 basis points, as we did see about $150 million or 10 basis point increase in the capital, and that's pretty consistent with what we would expect to retain in a quarter -- in a normal quarter. The denominator, we'd expect to get some benefit as we see some runoff typically in some of the higher weighted -- risk-weighted assets. This quarter, for the same reason that we got some improvement on the reserve, we got some improvement using the similar models. We got some improvement on the risk weighted assets as our historical data against a lot of retail analysis and commercial loans has improved dramatically. So as we've improved the quality of our portfolio, which reflected in our risk weights, and we've readdressed those risk weights in the quarter so we picked up some of the benefit of that so that was a little bit more of it. The 40 basis points in the denominator is probably heavy by about 20 to 25.

Okay. And then just thinking on the payout ratio, we hear that sustainable earnings, obviously very critical for payout ratios, and I'm just try to understand. Do you think that the improvement in the capital ratio that you got this quarter feeds into that much higher of ability to do the payouts in 2013? Or should we really be looking at what the earnings generation is driving in terms of improvement in the capital ratio?

Okay, let me make a couple of comments, and then Gerald probably want to make a comment or 2. Where -- the CCAR looks at things under normal and also under stress. And as we've indicated in the past, we intend to do pretty well because we've got some -- really, 2 things going for us. One is we don't rely on a lot of risky assets in order to generate our revenues, and the other thing is the mix of our businesses is a little less equity intensive so that a steep drop in the equity markets has a little less impact to us. So as a result, we can kind of continue to generate even through a pretty ugly environment like the ones that we've gone through for us. So it's really based on -- the payouts will be based on where we see our performance and what we see as being prudent, given where our capital ratios are. But certainly, it puts us in a position with stronger capital ratios than we would have expected at this point of the year to do a little better. I don't know, Gerald...

Yes, so maybe I can add onto that a little bit. I think we're quite pleased with that 9.8% Basel III Tier 1 common ratio. I think it gives us an increased flexibility to consider capital actions. I would generally say that the dividend payout ratio and the 25% to 30% is probably something for all of us to think about. And the total payout ratio last year, we guided you to about the 65% range. I think we have the flexibility to see that north of that 65%.

Our next question is from Glenn Schorr with Nomura.

Quickie, as you -- I think this has been asked in the past, but just always want a little more color. If you look at assets under management, they're up nicely 10% year-on-year, and the fees associated up 15% x acquisitions. That's great and normal. Assets under custody, up 9% year-on-year. The servicing fees are flattish. You gave some pieces to that. But I guess the question is, is there a reason why that, over longer periods of time, wouldn't have the same rational relationship? Is something changing in the mix that we shouldn't expect fees and assets to grow in line with each other?

Yes. I think some of that, Glenn, has to do with the fact that Corporate Trust and DRs are included in the Investment Service revenues. And so I think our Asset Servicing fees have, in fact, been growing, but the Corporate Trust and DRs have been declining, particularly in this quarter. DR is more seasonal than structural, and at Corporate Trust, we've just seen a runoff in the structured products, which are impacting overall revenues. Asset Servicing fees have been growing, maybe not totally in line with the assets under custody. But maybe I'll ask Tim to comment specifically on that.

Yes, sure. Glenn, it's Tim. Year-over-year, just a reminder, the Asset Servicing fees grew at 7% versus AUC of 9%, and I think you see a couple things. I think you see a little bit of a mixed shift. I think some of it is timing. I would certainly say that more of our new business converted towards the back end of the year. And then, frankly, a little bit of it is loss business by maintaining our strong pricing discipline. So hopefully, that answers your question.

Definitely. I appreciate all of that. Maybe a quickie on -- not the biggest number, just more curious. If you x FX, if you look at fixed income trading, it's had big swing up last quarter and down 46% this quarter. The explanation was lower interest rate trading revs. I'm just curious, we see -- if we look at the big broker-dealers, we're looking at like 15% swings, not a 46% swing. So just maybe a little explanation on what you're trading for whom on a quarterly basis as you grow out the global markets business.

Okay. There's -- there are really 2 activities there outside of -- or 2 key activities outside of FX and the other trading category. One of them is general fixed income trading, where we do make markets for our clients. So we saw that a little softer. And the thing that's more episodic is really around some interest rate trading. So we saw interest rate derivative trading. So we saw a fair number of interest rate derivative trading activity in the third quarter that we didn't see replicate itself in the fourth quarter. And the nature of that business, it is -- for us, sits on such a small number, Glenn, that a little change is a pretty significant impact percentage-wise.

Yes. No, I hear you, I hear you. Just more curious than anything else. The last one on -- a lot of talk about the collateral management opportunity. I know you're investing in it. We've seen some of the market participants not ready for central clearing. But -- so maybe a question on timing but also if you can even size the opportunity of -- and where you're at in the investment cycle for that opportunity.

Yes. Glenn, we continue to build out the capabilities. We've seen very good interest from the buy side. Traditionally, our collateral management has been supporting the dealer community, and we've seen some nice growth in our tri-party collateral balances. I think we produced a number for you. We are experiencing some fee growth in the area already where we're also seeing some net interest income growth in that area as we help optimize and transform some of the collateral for the dealer community in particular. So we're starting to see some good further attraction in this space. Part of the CSD announcement that we made is to support collateral services in Europe into the future. So we're excited about that. I know you all are anxious to see more transparency and information around this, and later in the year, I think we'll be able to put together some better numbers and direction for you. But we feel good about our progress, and we continue to see very good interest in it.

Our next question is from Luke Montgomery with Sanford Bernstein. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Yes. I was intrigued by your announcement last week that you're going to start the Central Security Depository in Europe. You just mentioned it. I'm wondering if you might comment on the cost of that and, really, the longer-term strategic possibilities. And then, also, do you think that's an opportunity that's unique to BNY Mellon because you have the corporate issuer client base, or can it be replicated by your global custodian peers?

Great question. I love that question. So, Tim, I'll -- yes, it's in your area. I'll ask you to address it.

Sure. Look, it's a bright spot for us. You know the regulations are changing, both Dodd-Frank and EMIR coming up on us very quickly. So that's driving people to make decisions, partly around the collateral question that was just asked to Gerald. But more importantly, there's a number of CSDs in Europe. We're the only one that provides the full value chain of services, particularly the notary functions, so the things that happened before secondary trading, and we think that's a unique differentiator for us. We started to do this initially to defend our Issuer Services business in Europe. But as the bond business and Issuer Services business grows, we think this could become a needle mover for us. So I would say watch this space. But you correctly connect the CSD strategy to collateral. Because in a post Target2-Securities environment, T2S should go into effect in June 2015, you have to be a CSD to play in Central Bank money collateral. So that's the other reason why we did this, which has a much more strategic aspect to it, and connects our collateral ambitions here in the U.S. to our collateral ambitions in Europe. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Great. And then just could you quickly come back to whether you think that's a unique opportunity to you, and could State Street do it, for example?

I would say relative to our traditional trust bank competitors, I don't think -- see anybody that can offer the level of services that we have, that the landscape's changing in terms of the current players like Euroclear and Clearstream. But again, I would say they're missing one important part of the value chain. But again, just think of this in terms of impact in 2013 as being somewhat modest and building over the next, I would say, 2 years. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Great, that's helpful. And then on the collateral management, clearly, people are talking a lot about the revenue opportunity, but I think a lot less so about what this means to risk and the interconnectedness of the financial system. And I think in one sense this is just repo, but I'm wondering whether the types of collateral transformation I hear you say that you're going to engage in, say, like lending out treasuries for corporate bonds, whether we should be concerned about the contingent liquidity risk you and others are going to be taking on to facilitate those types of activities for your clients.

Sure. No, it's a very good question and something we're very, very mindful of. We obviously need to continue to enhance our risk management capabilities in this space and ability to liquidate collateral if we had to, but don't think of all of the transformation occurring on our balance sheet. Some of our role is to be an intermediary between parties where we act as the agents. So in some cases, we'll use our clients' treasury through our treasuries in that transformation process. In other cases, we'll simply be the agent between the parties. So we don't always have to be the lender. Obviously, there's a lot of value in that, but they're -- you're correct in saying there's risk associated with it, and we have to be mindful of that risk and manage it very, very well. And so we are enhancing and building out our capabilities in that space to be able to handle it.

And, Luke, if I can add something to that. I mean, we're sitting on $90 billion or up to $90 billion in central bank deposits. If we can put a little bit of that to work to relatively short-term secured floating rate loans that effectively can convert a corporate bond to cash that can then be posted at a central clearer, that's a great trade and it comes with very little -- we certainly have the liquidity to handle it, and it comes with very, very little incremental risk and some incremental income. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just a follow-up on that one and final question. Do you envision the bulk of your activities to be as the agent administrator or as principal? Like which of the 2 of those is the bigger revenue opportunity for you?

Well, the immediate quick hit this is -- net interest income shows up with virtually no expense, and therefore, bottom line income. So you're going to see the more quick revenue hit in that space. But longer term, we want to have it be more at an agent position, where we get continuous repeatable fees, and that's what we expect out of this. And so it's creating that neural network, as we refer to, and have all the parties use us, principally as agent rather than acting as principal and using our balance sheet.

Our next question is from Ken Usdin with Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Just to follow up on the NII and securities gains topic. Todd, I heard your comments about hoping to keep that combination of the 2 flat. But can you talk a little bit more about how risk is changing within it? And you obviously have a lot of unrealized gains left. But at some point, you're going to sacrifice net interest income for gains and that could run out. So I just want to understand how long you can see the visibility out on keeping those 2 kind of working together, because at some point you may not be able to keep the gains going in lieu of protecting your NII.

Yes. Actually, I look forward to that date because it probably implies a little higher interest rates, Ken. But the -- I think the simple way to think about this is we try to maintain a portfolio about 2 years in duration, relatively very low credit risk, as you can see from looking at it. So each quarter a quarter burns through and as we take -- as some of those securities come down and they get very rich because there's strong interest on the short -- on the relatively short end of the curve for those assets, we'll sell some of the richer securities and then we'll reinvest back out on the curve. That gives up -- it can give up a little bit of NII on a go-forward basis, but it's not too much. And that's why -- and it maintains the portfolio balance to where we want it. And that's why as we started to look more and more of this, it's exactly what's been going on, and we wanted to make sure investors see that and that we would intend to do that as long as the interest rate environment stays where it is. If the rate environment changes, so if we see a rise in rates, we'd probably do a little of extension duration. There would be no need for that type of activity, but we would be making up for it in our NIR. Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just cleaning up one, can you tell us what the accretion portion was this quarter?

I don't recall. Off the top of my head, it was probably around $60 million. It tends to come in about $5 million or so a quarter, as we had indicated in the past. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Right, okay. And then on a separate topic, good trajectory on custody. But what's getting harder to understand within that Asset Servicing line is how the custody fees are going. Following on Glenn's question, this quarter also looked like you had about the slowest win rate of new custody wins. So I was wondering if you can just kind of talk us through what's happening just on core custody revenues, because you have to x out collateral management, x out broker dealer services, x our security lending, and we don't see any of that. And then also if you could just touch on, like is anything changing with regards to the speed of new wins on the core custody side?

Tim, why don't you take that one?

Yes, sure, I'll take that. But first, let me take them in kind of reverse order. Don't get overly concerned about that new business win rate because less of the business is geared to AUC, and that's something we need to think about. I've gone back and looked at over the last 6 quarters in terms of win and pipeline, it's been pretty consistent. And the mix and the ratio between AUC going up 9% year-on-year and fees going up 7% I talked a little bit about earlier, I wouldn't be overly concerned about that, although the mix is changing a bit. And so we are doing more of middle office outsourcing and transfer agency and things. But there's also some good news in there. You're also seeing the repricing that we've been implementing now for some time has some traction, and so I wouldn't say -- I'd also just say that the business continues to be very competitive, especially in the large end of the market. So no, I can't tell you there's been any significant shift there, Ken.

Yes. The assets under custody wins from quarter-to-quarter are pretty lumpy. If you get some big ones in 1 quarter, you won't necessarily see them in the next quarter. So that's not a steady state. But we are seeing a steady state in terms of the increased interest in mid-office and derivatives, servicing and a variety of other things. So -- some of which require -- that are slow to ramp up on the revenue side, even with the announcement that we make, and over time, that we expect those revenues to come in. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Got it. And then my third question -- last question is just on Issuer Services. And you guys had very much given us an understanding of the seasonal decline that we would expect to see in DRs and then also the ongoing challenges on the structured finance runoff, which you've given that kind of that 50 or 75 basis point headwind. So how close are we to -- it's tough now to talk about it sequentially because of the seasonality. But as far as just the business is concerned, as we think about the year ahead, knowing what we know about the environment, at what point are we getting to a kind of a bottoming of those 2 line items? And do you expect growth in Issuer Services as we look ahead on a year-over-year basis?

Yes. I'll make a couple of comments there. First of all, let's split Issuer Services into 2 businesses, there's Corporate Trust and there's DRs. So DRs is a cyclical business. It's a -- it's really largely driven by the developing markets and the BRICs. So we're seeing softness in new capital development there and M&A and any type of corporate action. So that -- and that tends to be somewhat cyclical. So with the global downturn, it's reflected even more dramatically there. Back in September, when we did an analysis, unfortunately, we don't -- we haven't computed those numbers yet, when we looked at the total number of corporate actions in the DR space, it was down about 30% year-over-year and that's what really drives the revenue base there. So that's going to come with the cycle. So we -- if you expect an uptick and a little combinations and corporate actions in the developing world, we'll see that. And -- but if not, it'll -- it could get -- it'll stay here. And that -- then that will have some impact, as I mentioned, on leverage because it doesn't come both ways. There's not a lot of expenses associated with it. With -- in terms of Corporate Trust, that's more a reflection. We're seeing okay business in most components of it. But the non-agency book and the CLO-CEO book continues to run off. There are some CLOs being created, and we're getting our market share of those, at least. But it's not fast enough to stop that decline that we've seen, which we would probably expect over the next couple of years.

Yes. And, Ken, the only thing I would like to add, it's Karen Peetz, is that we did see some great spots. It's not enough to kind of set a trend for Depositary Receipts. But December of the quarter, we had some optimism where the pipeline's up pretty significantly as we head into the new year. And then the only thing I'd amplify on Todd's comment about CLOs is we are the market leader as those new CLOs are coming to market. There are 127 all of last year, of which we won 33%. So hopefully, it will begin to offset the decline that's happening on the existing book.

Our next question is from Alex Blostein with Goldman Sachs.

I want to go back to NII for just one sec. Todd, you talked about in the past is you kind of trying to keep net interest income flattish. Balance sheet is up about 12% year-over-year, and I get that interest rates are lower. But you guys talked in the past about trying to reinvest little bit more. So I guess should we think about the decline in NII, just from a dollar perspective, as a sign you guys not being able to reinvest quickly enough or I guess the rate compression is a little bit worse? And again, what gives you confidence that you guys can, again, kind of keep the number flattish from here if rates stay where they are?

Yes, I'd say there are 2 things. Number one, the contraction rates was a little heavier than we had expected and QE3 drove some of that. And the one thing that hasn't moved as quickly as we had hoped is some of that secured lending that we just described. So our view is we're going to see some burn off of assets. We can fight that headwind if we have the growth in our collateral services business and the principal lending side of that business. That will basically moderate it, along with the repayment of some of our trust preferreds. And -- but spreads are tough. I mean, there's no question about it. And the -- with the Fed in there buying mortgages, they've become so rich. It doesn't really make sense to put some of the shorter-duration mortgages on our -- in our book. So that's -- the way we sustain the NII that we have is going to be -- and the securities gains is going to be a combination of managing the portfolio the way we had described and putting more of that money to work at a little faster pace. We weren't as successful as we would've like to have been this quarter.

Okay. And a follow-up on the collateral transformation opportunity for you guys. I understand there's still lots of questions around the size of the market and how much collateral is actually going to be needed over time. But I guess when you think about the incremental NIM pickup for you guys, what is it today? You mentioned $90 billion sitting deposits with the Fed or just in treasuries, earning 25-ish basis points. What do you guys get currently on secured lending, which I guess we could try to use as a proxy for what you would do on the -- what you would get on the collateral transformation opportunity?

Yes, it can be all over the place based on the counterparty and the collateral underneath it. But it would certainly be 35 to 75 basis points higher than which you would see holding the money at the Fed, Alex. And the way to think about it is we would like to see the book grow by $20 billion, and so that's some of the -- that would be our ability to offset some of that spread contraction headwind.

And, Alex, just a little bit of other color. The fourth quarter between the physical (sic) [fiscal] cliff in Europe and a variety of other things that were going on, I think people, particularly towards the end of the quarter, were really in a risk-off mode in terms of leaving a lot of cash all around the world. We're already starting to see some of that cash go back to work. Hopefully, we'll see some more capital markets activities and, therefore, demand for borrowed securities in the sec lending side, demand for further collateral transformation as people pick up their trading activities. So we're a little bit more hopeful than -- concerning the fourth quarter activity, that market activity will pick up in that space, and therefore, we'll be able to put some more money to work.

Got you. And then just the last one for me. I was hoping you could dissect the Issuer Services a little bit. I think we kind of -- the picture on the DR side of the business is clear, some of that is cyclical, and that's certainly shown up in the numbers. But when you think about the Corporate Trust business, 2012 was still a pretty good year for total DCM activity, so to speak. Corporate high yield was probably one of the better issue of the year as we've seen. So is there a way to kind of tease out, I guess, the sensitivity to your business if we see a decline in kind of corporate issuance and I guess couple that with the fact that the structured credit stuff, which I guess is about $100 million of annual revenues or so, keeps running off?

Right. So it's Karen again. The high yield and the corporate debt types tend to be our lower fees. And there's also -- even though high yield, as an example, we always dominate, it's still a small number of deals in the realm of kind of global issuance. So that can't kind of carry the day. The other thing is the structured book has historically been the highest fee and margin. And so as that's runs off and also as new deals are coming in priced less than the old deals were, you get this kind of real churn that's happening in the business. So to a large extent, how we're reacting is to just transform the business model. We've gone to a more functional alignment so that we can manage the expenses. And we're in this kind of wait-and-see mode. We have a great footprint. We have a great kind of strategic capability, but we're very much going to have a lot more flexibility in how we can manage expenses as we go forward.

Our next question is from Brian Bedell with ISI Group.

Could you just flesh out the expenses a little bit more in the fourth quarter? I mean, just looking to try to understand the trajectory as we go into 2013 in a few lines, such as professional services and software and equipment and business development. They looked a little high. Just wondering if you can frame out the seasonality of that versus what we might see in 2013 and also talk about the pace of the cost-saving initiatives. I think you're targeting a little over $400 million for 2013. Is that still the number we should be thinking of? And so I guess what I'm getting at is are we still looking at around a $2.8 billion quarterly run rate, or do you think you can improve upon that?

Sure, Brian. Answering the question around our initiatives, I think you should look at what we had -- the guidance that we had previously given, and we expect that we will be in line with that guidance for 2013. That's what we certainly budgeted for. In terms of some of the quarter-end driving expenses, I mean, we saw some seasonal things, like our donations were up, our marketing expenses were up. We tend to have a conference. In fact, we had 1 conference that we only have every 4 years was -- it came in this fourth quarter. As well, it tends to be -- we take a hard look at some of our assets in terms of software, and there were a couple of write-offs there. And typically, that will happen in the fourth quarter, and it can also be related to our operational excellence initiatives as we start to sunset some of the systems. We're also making some investment in our brands as well, and we'll roll that out in the first quarter.

That being said, Brian, given the environment that we're operating in, we just have to be very, very disciplined around our expenses. And it's one of the things I said in my opening comments, we're going to continue to try to drive efficiencies across our operating platforms and our expense base. So it's something we have a lot of focus on and a lot of attention on.

Okay. So it sounds like that $2.8 billion is a little elevated, and as you go into 2013, the cost-saving initiatives should help offset some of the natural inflation from a base that's a little bit lower than $2.8 billion on a quarterly basis. Is that fair to say?

I think you're spot on, on that.

I think that's fair. And be careful to -- as you design your model, think about the revenue mix.

Right. Right, of course, okay. And then on -- and asset servicing, Tim, maybe can you talk about how the pricing initiative is going? I know you repriced a lot of the lower base -- or do you expect some more attrition to come from some of those repriced agreements in 2013? And if you can talk about that in conjunction with the business that you're winning on the mid-office, maybe just sort of a net outlook for growth in Assets Service and revenue in 2013 in that area.

Sure. Why don't I start with something I haven't mentioned yet, Brian, which is we have an excellent pipeline of business that will convert over the next 3 quarters so -- of the wins that we have not converted yet, which is significant, it's a little over $800 billion, so that's 1.5 kind of quarters of activity in value that hasn't quite converged yet into the run rate. But on pricing, just to remind you, this is a long-term strategy for us, structurally realigning the business. We started with the low end of the client base, as you'll recall. The way I would think about is if you look at Asset Servicing fees, not Investment Services fees, but Asset Servicing fees, we think we've got pricing power over, let's say, 10% to 12%. We've been raising prices steadily where we're allowed contractually to do so. We're retaining 75% of the clients with about a 20% uplift. I don't think that's going to change at all. We're staying very disciplined on that. And the great news there is that'll drop straight to the bottom line. So we've only got about 10% of that showing up in the run rate yet, so I think there's upside there. But because of the nature of when clients are repricing, we're largely timing the repricing out to when client contracts come up for review. That will largely be done by the first quarter of 2015. And personally, I think the more impactful thing over time will be the other end of the spectrum, which is those very large clients where we see opportunity to do a lot more in places like collateral in our global markets capabilities, and that's something we focused on as well.

Okay. And large part of that $800 million is mid-office that's coming in?

It's really mixed, Brian. You would see a core bundle of Asset Servicing with securities lending and foreign exchange and accounting. And then you'd see about half of it, which are things like middle office outsourcing, transfer agency, fund administration and that is something. That mix has shifted slightly over time. So it's about 50-50.

Okay. Okay, that's helpful. And then just real quick on the net interest revenue outlook of staying flat. Does that include the assumption of deploying some of the $90 billion of central bank deposits into higher-yielding secured loans, Todd?

It does, Brian.

Okay. And then money market fee waivers for the fourth quarter. Could you mention the EPS hit from that, and then whether you'd see fee waivers moving up in the first quarter, given that little bit of a decline in short-term rates?

Yes. The money market fee waivers were consistent with what we had seen in the third quarter, so there really hasn't been much of a change. There's actually slightly improved from where we were on a year-over-year basis. So right now, I don't -- of course, if you're seeing any -- I don't think we're seeing any real change into the first quarter as well.

No, in Investment Management, fee waivers were the lowest negative impact to us that they have been in 6 quarters, and it's been pretty steady so far. We're still sorting through sort of the year-end flows and impact on repo markets and whatnot. So -- but I would say it's definitely improved from a year ago.

Our final question today is from Josh Levin with Citigroup.

So someday, interest rates will go up. And when interest rates go up, that's certainly very positive for your business overall. But given that most of your assets are fixed income, is there a partial drag on your revenues, because higher rates means lower fixed income volumes just because of the way duration works and that means -- translates to lower servicing fees? I mean, how should we think about that relationship?

And maybe a few of my colleagues can jump in here on this question but if you had a very sharp sell-off in fixed income, that would probably be a price change across the portfolio, pretty modest. If it was 5%, that would be a lot. And for most of our Asset Servicing businesses, our fees are not necessarily a function. They're not -- it's not like AUM where it's a basis points. There's a little bit of that. But most of the fees are related to transactions, as well as to accounts. So there's 3 different sources of fees. So you might see a modest decline in the AUC, assets under administration, and a very modest decline in the amount of fee -- related fee revenue to it.

And, Todd, if I could just add one other thing. Josh, it's Tim. Back to this whole collateral theme, I would hasten to guess we're the largest custodian of U.S. treasuries in the world. And as these regulations take effect, where we've talked a little bit about what the increase in volume will demand in terms of posting a collateral, a lot of those U.S. treasuries are going to be needed. And that's why we link that back directly to an inherent medium-term strength, whether it's transforming the collateral or through our traditional securities lending and financing capabilities. I think that's going to be a big plus for us.

Okay. And my final question is on the tri-party repo market. There have been some changes there in terms of structurally and working with the fed. Are you seeing -- are there any changes to pricing or margin in that market?

Essentially, no. We're putting through the "tri-party reform," working with the industry, both the buy side and the sell side. Pricing for our services is held up as it has been in the past. There's been more activity. I think the main issue around tri-party reform is taking risk out of the system, and I think we're making very good progress on doing that. So it's not a pricing issue. It's really a reform issue on taking risk, intraday risk out of the system.

And the only thing I would add is that we have been pricing for daylight that hadn't been priced before, and so there has been some revenue benefit from that, but it's modest.

Thank you. Well, thank you very much everyone for your interest and dialing in today. Sorry we couldn't get to everyone's questions. If you have further questions, please give Andy Clark and the team a direct call, and we'll be happy to follow up with you. Thanks again, everyone.

If there are any additional questions or comments, you may contact Mr. Andy Clark at (212) 635-1803. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating.