Good morning, ladies and gentlemen, and welcome to the Third Quarter 2016 Earnings Conference Call hosted by BNY Mellon. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call 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 Ms. Valerie Haertel. Ms. Haertel, you may begin.

Thank you. Good morning, and welcome, everyone, to the BNY Mellon third quarter earnings conference call. With us today are Gerald Hassell, our Chairman and CEO; Todd Gibbons, our CFO; as well as members of our executive leadership team. Our third quarter earnings materials include a financial highlights presentation that will be referred to in the discussion of our results, and can be found on the Investor Relations section of our website. Before Gerald and Todd begin, let me take a moment to remind you that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors. These factors include those identified in the cautionary statement in the earnings press release, the financial highlights presentation and in our documents filed with the SEC that are available on our website, bnymellon.com. Forward-looking statements made on this call speak only as of today, October 20, 2016, and we will not update forward-looking statements. Now, I would like to turn the call over to Gerald Hassell. Gerald?

Thanks, Valerie, and thank you for joining us this morning. As you may have seen from our release, we delivered strong results for the quarter. On adjusted basis we are $0.90 per share up 22% year-over-year. Total revenues grew 4% while total noninterest expenses were down 1%. We generated more than 500 basis point of positive operating leverage resulting in an adjusted pretax operating margin of 35%. Now since we shared our three-year strategic plan with you in October 2014, we have delivered seven straight quarter of solid performance against these goals despite the relative lack of industry and market catalysts building a strong track record of success, managing what we can control through all environments. Our assets under custody and administration increased to $30.5 trillion and our assets under management increased to $1.7 trillion. Our success reflects our relentless focus on creating new solutions for our clients, reducing costs and improving our client experience. It also reflects the progress we are making in our cultural, structural and operational transformation. All of this has created a more collaborative and solutions driven approach in working with our client. Now, central to our growth strategy is investing in future revenue generating initiative, deleverage our expertise and scale as we seek to strike the right balance to deliver both near-term and long-term shareholder value. NEXEN, our digital ecosystem is one of the most transformational of our investment. NEXEN is digitizing our company and in the process enhancing our clients experience in creating efficiencies for us. Clients are just beginning to experience the ease with which they can connect with us at their desktops or on their mobile device. While it's early days we are confident in our future as we continue to invest, innovate and transform into a digital data-driven global financial services…

Thanks Gerald and good morning everyone. My commentary will follow our financial highlights document, starting with Slide 4 which details our non-GAAP or operating results for the quarter. Our third quarter adjusted EPS was $0.90 that's 22% higher than the year ago quarter. On a year-over-year basis third quarter revenue was up 4%, expenses were down 1%, and we generated 511 basis points of positive operating leverage. As we've noted in prior quarters, the strength of the dollar continues to impact results negatively for revenues and it's positive for the expense categories. However the net impact from currency translation is minimal to our consolidated pretax income. Income before taxes was up 15% year-over-year on an adjusted basis and it was up 12% sequentially. On a year-over-year basis our adjusted pretax margin was up four percentage points to 35%. Now while this reflection part of the progress we continue to make it's not a watermark we would expect to match in coming quarters as we benefited this quarter from seasonally higher DR fees. And return on intangible common equity on an adjusted basis was nearly 24% for the quarter that's up three percentage points. Moving ahead to Slide 8, I'll discuss our consolidated fee and other revenue. Asset servicing fees were up 1% year-over-year and flat sequentially. The year-over-year increase primarily reflects higher money market fees and securities lending revenue and that was partially offset by the impact of a stronger dollar and the downsizing of our U.K. transfer agency business. Clearing services fees were up 1% year-over-year and they were down slightly sequentially. The year-over-year increase was primarily driven by higher money market fees partially offset by the impact of the previously disclosed lost business largely driven by industry consolidation. Issuer service fees were up 8% year-over-year and 44% sequentially.…

Thank you, Todd. And we can open it up for questions.

[Operator Instructions] Our first question comes from the line of Ashley Serrao with Credit Suisse.

Good morning. So, you've got some great margin improvement, but it feels like Investment Management isn't where you want it to be yet. So I was curious if you could provide us an update on how you are thinking about the margin potential for the segment. At this point, is margin expansion more dependent on your various revenue growth initiatives? Or is there more work to do on the expense side of the story, too?

So why don't I take the beginning of that and then ask Mitchell to comment. We do think there is additional margin improvement within investment management. I would note that we are running through the existing expense space. The cost associated with severance and shutdown of certain businesses. So that's in the existing expense space. I also will say that we are very pleased to see some positive flows into our active management areas, which has some good fees associated with them. So the expenses are bit high at the moment as we freed up a variety of activities and we do think the revenues are starting to come on due to strong investment performance. So Mitchell, why don’t you add some additional comment?

Yes. I think that on the expense side we have taken some actions. There are some severance charges and one-offs in there as we’ve shutdown a number of initiatives that you’ll see really flow through into 2017. So it’s the noise of the expense of reducing the run rate cost that you’re seeing this year you won’t see next year, number one. Number two, the industry has had a lot of challenges on the asset close side but in saying that we’re well diversified, people were reactive versus passive. We have 18% of our assets in passive, so we’re nicely diversified on that front. Performance is looking very strong with respect to – with respect to our equity performance is been good and flows have been slowing down, negative outflows have been slowing down. You do see we’ve been building more alternative strategies, our alternative inflows have been increasing modestly over the last few quarters and has been positive for at least five to six quarters. Those have high margins. The asset mix meaning that the equity outflows have slowed. You have some outflows in indexing were passive. Those are much lower margins. So the way the flow situation is looking, I think it will start to benefit us going forward. And I think we’re nicely positioned given the regulatory environment with the DOL to win some of this business next year. We had some idiosyncratic issues with sovereign wealth funds in the Middle East that we’ve concentrated and I think those are forfeited as well. So I guess, the long and short is I see opportunities on the revenue side and I think we have been quite aggressive on the expense side. You'll see more flow through in the beginning of next year.

Thanks for all the color there. I guess our other question was -- I was curious what the client reception has been to some of the balance sheet actions taken this quarter on the deposit side, and if you feel you can do more here.

Sure. This is Todd, actually I’ll take that. As we had indicated in the second quarter there were two things we’re going to do. One is we’re going to downsize the activity that was not client related that was taking place in treasury. So we did have some deposit taking and some reverse repo and repo activity in treasury that expanded the balance sheet by about $20 million or so that we took down in the quarter. Those were relatively high-yielding funding sources and the margins and that was relatively low and that's why you saw the NIM improve. That had very limited impact or zero impact on the clients. There are some adjustments to clients, but again, its just a – it’s a handful of clients and we’re providing them alternatives to our balance sheet. So we don't think its going to have a meaningful impact to the client relationships. We have actually see a little bit of a spike in the fourth quarter in our deposit base, primarily related to one-time events, very large escrow balances around some corporate trust activity. So we have and since seen that decline, but it will impact slightly the average deposit just for the quarter but not for the long run. So we think we can continue to bring down the balance sheet a little bit. We don’t have to bring it down a whole lot more. We do need to bring it down a little bit because you can see the progress that we made in the quarter was a little ahead of what we had anticipated in 5, 7 DSO. So I think we’re in pretty good shape without knowing a lot more or impacting our NIR to meet our capital targets.

Great. Thank you for taking my questions.

Our next question comes from the line of to Ken Usdin with Jefferies.

Thanks. Good morning, everyone. First question, I just want to ask about the servicing business. You mentioned you had good wins again. AUC/A was up really nicely; but it was down a couple million even ex-sec lending or just down slightly. I'm just wondering, could you talk through -- is there seasonality in asset servicing on the collateral business? Is there fee capture challenge, or did some of the business just not convert yet? Can you just walk us through your expectations for asset servicing and the trajectory there? Thanks.

Yes. This is Brian Shea, happy to do that. I guess, you know, the asset servicing business was – the fee revenue was flat sort of year-over-year and sequentially, driven by a little bit of improved fee waivers and improves net new business offset by some of the unfavorable impact of currency and little bit lighter activity volume in the score. So I think, the other thing that’s affecting our servicing business is that we are really focused on profitable growth over pure revenue and market share. There's a – we’ve been going through a portfolio review of prior services and solutions and reducing things that are not really profitable or don’t add good return. The best example of that which actually is putting downward fee revenue pressure on us but improve in our profitability is the repositioning of our UK, TA business and we are committed to the global institutional TA business and growing that but the UK local retail business we’ve been exiting and so we’re actually pushing out revenue and clients to other providers. And what's happening is we’re just reducing our revenue but our operating margins fee expense ratio and our profitability is improving. So that’s really the focus of the asset servicing business. We think longer-term, there is a secular trends where asset managers are under fee pressure, particularly active asset managers, and so we think there's a longer term trend that's in our favor around middle of its outsourcing, extending our technology solutions. The need for growth for collateral services and derivatives marginally promise all the other things that we think will drive longer term growth and enhance servicing business.

Great. Thanks, Brian. So second question just on the expense side. Todd, you mentioned that the year-over-year is still being helped a little bit by FX translation, but down 1% to 2% is still a great result regardless. Can you help us understand, just of the full year benefits how much of that is FX translation? And then as you look out, depending on that first part, do you think you can replicate the type of stable, if not declining, growth as you look into in 2017 and beyond, given that you still seem to have a lot of this stuff still on the come?

Sure. So couple of questions there, Ken, but first one as to the impact, its probably about 100 basis points. And If you look at our operating leverage is probably reflecting about 100 basis points in our operating leverage. So we are getting a tailwind to the expense phase from the strength of the dollar. And specifically, but the move in sterling because we do have a fairly large expense base in sterling, more sets offsetting us and then offsetting our revenue lines and the one that Brian just walk you through asset servicing – it has to – has a significant component of non-dollar related revenues that’s being impacted. That being said, the underlying trends, I mean we did make investments in this quarter to continue to manage down our costs – across a number of different line items. And I think we – I think we made some good progress that Gerald pointed out on the occupancy front as we exited another building in Pittsburgh and we got the benefit of our programs in New York kicking on a year-over-year basis as well as what we’ve done in Philadelphia and Boston, so there's a little more room in occupancy and we also have continued to make investments in automation. And I think there's more to come there and we’re also that we need to take some severance which gives us the opportunity to get our staff in the right locations as well. So I think we’ll continue to make good progress. I think we – Brian and I and Mitchell lead the team that identify opportunities and continue to add to the list and it’s – like we say it’s not a program it’s a process and we’re not complete yet. I did give guidance for the full…

Thanks, Todd. Great color.

Our next question comes from the line of Glenn Schorr with Evercore ISI.

Hi, thanks very much. One quick follow-up in that whole balance sheet remixing and NIM dynamic. You gave us a lot of detail on the deposit front. Was that the bulk of the 8 basis points? Or is there -- can you tell us what you're doing on the asset side also? In terms of -- there was some commentary in the release on moving towards higher-yielding assets. Just curious for some color.

Yes, Glenn, this there was - the driver of our balance is the right end size, so the actions growing through Repo and defined reducing deposits mostly out of Treasury – of our Treasury Department is what brought the balance sheet down. And what we do have left hand side was just reduced lower yielding assets. We are seeing some – we did see over the course – of the course some growth in our loan growth which is one of the highest yielding portfolio, so the combination of those two things both increased NIR while bringing the balance sheet down. And we - so there is no real remixing if you will outside of the actions I just described.

Cool. I appreciate that. Then one other follow-up on the asset management conversation. So I guess I'm curious. You had mentioned some fee pressure for the industry. You also mentioned that you have some good performance. But as you've been trying to build out the retail distribution side, we have the fee pressures you mentioned, but also distributors are now looking for more compensation in a post-DOL world. Can you talk about some of those pressures and how it impacts you guys specifically?

Yes. Sure. A couple of things. More than fee pressure is flow pressure. It’s the amount of outflows in the industry if you think about what’s happen though obviously it does impact fees as well. And particularly on the DOL side, I think there is a couple of things on our retail basis we're doing several things. First off, with the DOL, the focus is really on the home office not that on t the field, so we don't need as much field coverage as we had in the past as the home office will be to a research-based model making decisions with respect to what goes on their platform. If you get the exact amount but if you look I think [indiscernible] they had about 4000 products there on their platform and they are looking to go to a thousand. So what happens is you have to have either highly active products that were good price passive products with scale with performance and the right pricing in order to be on that platform, so we need to be in a position to be on that platform by making sure the pricing is right, and that we've got the right performing products for them. And as a result of that you will get a lot more scale because with a reduction of that many products the assets will be much more concentrated into fewer products and we think we can position ourselves nicely to end up remaining on those platforms and achieving the scale that will offset some of the price pressures quite frankly.

Glenn, just as a reminder about 80% of our assets under management are institutional and so as gearing the same fee pressure there as oppose to be performing certain thing from an enterprise perspective we have a very large distribution platform called Version [ph] and so with maybe a negative effect on one side it has a positive effect on the other.

I definitely appreciate that. Thanks.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

Hi, guys; good morning. Hey, Todd, just a quick -- I guess another follow-up around the balance sheet and then an NIR discussion. If you look by bucket, it looked like security yield has dropped pretty meaningfully sequentially; and maybe some of that, it's just a lower rate backdrop in Europe. But curious if you guys can give us a little more color what's going on there. I don't know if there was any premium amortization that was hurting that this quarter that may or may not reverse.

Yes. There was a little premium amortization – there wasn’t a significant drop there. In fact, sequentially the securities yields were flat versus down from a year ago flat at this point. And we actually think that we will see that turnaround will – the recent improvement in the yield curve is a net positive and some of these securities are repricing at LIBOR and they are getting the benefit of higher LIBOR. So we are actually are getting back to securities…

Got you. Then your comment around flat to slightly up NIR next quarter, does that assume a December hike? I guess if not, given the balance sheet moved around a little bit, all else equal, how, I guess, should we be thinking about the NIM impact from a 25 basis point hike in December?

Well, 25 basis points in December won’t do much for us because its just a short period of time. Because its only be a couple of weeks in the entire quarter. So it wouldn’t hurt but it would drive the deal a whole lot. We are getting some benefits from the LIBOR rests, so the LIBOR spreads are I think is going to up on average in the quarter. So we’re starting to see some of that benefit now. That’s primarily – that’s probably the number one driver of why we think this is going to be up in the quarter. There are kind of two good things that happened this quarter – that’s happening right now is number one, we are seeing the higher short-term LIBOR rates and yield curve as deep into little business. We have some reinvestments to do in this quarter. We are picking up a little benefit from that yield curve. And that’s why we felt comfortable saying that flat to up despite the smaller balance sheet that we’re targeting for the quarter.

Right. Sorry; I should have said just like in a run-rate steady-state benefit. So I get the fourth quarter; not a ton of benefit. But I'm just saying like from a run-rate perspective, what kind of sensitivity to the NIM should we think about from a 25 basis point hike?

Well, we've given you some color if you look at the -- if you look at the queue and sensitivity to the 100 basis points the rate move is typically in the vicinity of about $100 million to $150 million of benefit to net interest income. And that includes so the NIM is probably a little more positive, because that includes some run off size of the balance sheet, yes, it's still positive today, net interest income.

Got you. Great, thanks.

Our next question comes from the line of Betsy Graseck with Morgan Stanley.

Hi, good morning. A couple of questions. One, Gerald, you mentioned in your prepared remarks about the new growing revenue streams that you've got in some of your new businesses; I think specifically around investor services. Maybe you could speak to that a little bit and size it for us.

Yes, what I referring to is couple of things. They are generally collateral management and the initial margining that we put in place sort of large broker dealers that they have to comply with the requirement. As of September 1st we work with all the market participants, got the documentation in place that this is up and running. And we are already seeing positive revenue flows as a result of that. Collateral management broadly across the world, you need to grow nicely. And Brian mentioned the middle-office outsourcing is a real opportunity. We've got a lot of people lined up. We want to make sure those dialogues are in such a way that they are willing to do more standardize approach to that offer servicing, so it's difficult for us them and profitable for us. I'd say those are the key areas that we see opportunities strengthening.

The collateral management side is coming through the fee line? Or is it also partly coming through the NII line?

It's mostly fees.

Yes, okay. And then the other question, Todd, for you is on the real estate activities that you're doing and the shrinkage in real estate. You highlighted -- what was it -- 600,000 square feet coming off of your books. Could you just give us a sense as to the size of that and how much it impacts your expense line? And then looking forward, how much of the real estate that you have today do you think that you could shed over the next year or so?

Sure. So occupancy historically has been running. It was over $600 million. We brought the run rate for the full year to $100 million to $600 million and we've actually brought down, we look at the -- we call it vacancy, but we look at the space for employ and we brought that down dramatically as we have a lot of vacant space throughout the company. So we are managing that far more aggressively. I wouldn’t get fixated too much on that line, because I said $600 million of expense on over $10 billion base line. But it does improve where we were the efficiency of how we work and making sure that we are getting in the locations that are most efficient for our staff. So, little more on that line that we think we can do, certainly it's nice to see it going down while revenues are actually going up.

Okay. But your run rate this quarter suggests that there should be more downward pressure there into next year as well. Right?

It's also Betsy we are running any actions and we are taking to reduce further cost through that line, so from time to time you may see us take some action as we shut something down, if we terminate all this early something like now we might see a little bit open that and we are just eating that through that line. So I can't really say that from quarter to quarter it's going to just slightly down. You might see every now and then that we've done something to improve the future for us.

Okay. Then just trajectory on the overall efficiency ratio, I know you spoke earlier to the asset manager side of the business. But maybe you could speak to the overall expense ratio, investor services in the Company generally. How much more legs do you think it has over the next cycle here?

I'll start and I'll hand it over to Brian. So if you look at the ratio that we show you expenses grow our fees relatively to expenses and we have moved that. There is some seasonality into but if you adjust on a year-over-year basis, we move that meaningfully another 300 basis points this year versus and 300 basis points last year. So this particular quarter we are now at 103% which is the best that we've printed. So I think it's reflecting the strategies that we've got. I mean one of the things that Brian pointed out we are exciting some businesses that were not profitable, have high cost. So we've given up a little revenue, but it's really benefited us in the profitability and it's also benefiting us in this particular metric, in terms of where more actions, more work we think we can go. Brian?

Yes, I think that 103% is 100% for us and even adjusted through seasonality and it's still up significantly year-over-year. So it's the quarter is improving. I echoed your comments Todd and Gerald comments so I think this is improving process. It's really part of the cultural change and we are gaining momentum and we still have a pipeline of initiatives including people think of business portfolio when we have done some of that, but we are looking more now deeply at product service and solution for reduce, and again making sure that we are gaining good return on the investment and good client adoption value from the investments we are making. So I think you'll see continue tweaking of the product service and solution portfolio and review, continued progress on every element of this is improvement process, the alignment of the drivers of our costs with client pricing, Gerald mentioned the overdraft angle, we have a pipeline of other an issues there. And we are driving more value from in enterprise team work which there is many examples of that, but our ability of one is the an excellent platform it's going to be also deliver over the whole company in a way that it enables us to drive cost to the solutions more and more. And I guess you know the cost or trial for this also doing well. It's partnership between Pershing and the private bank where we now have over well over $3 billion in credit facility established from our private bank to our independent broker dealer and all right Pershing and that's a significant revenue driver for wealth management business. It's a great example of the lever will increase sort of connecting the solutions across the investment process. So all of those things are captured and tracked in the business improvement process and I think we have more to do.

That the average is bad on the structural cost side, we are still finishing up converting on the number of operating platforms, where I think we are still on the early innings of further automation through artificial intelligence, machine learning, robotic. I think we've got more work to do and more opportunity on chopping away the core structural cost. So we are actually fairly optimistic that we can keep on this pace.

Okay. The pace that you've had over the last year, fairly optimistic you can keep that going over the near term?

Yes, we can't get you infinite operating leverage or margin that 100%, we have to keep reinvesting in the businesses, but we feel good that we can keep chopping away the core structural cost of the company.

Thank you.

Our next question comes from the line of Mike Mayo with CLSA Bank.

Hi, Gerald. I just want to know the punch line from what you just said: You can keep chopping away. We heard a lot of positive initiatives with the business improvement process, from real estate to cultural change to digitization and NEXEN to -- and you're optimistic that it can stay in place. On the other hand, the guidance that you gave at the top of the call implies the profit margin, which was 35% in the third quarter, would decline in the fourth quarter. So where do you think the profit margin should be over time, and where do you think it will be? And I guess I have some follow-ups to that. But subpoint to the question where will be pretax margin be: the Investment Management slide, Slide 19, that hasn't shown the good year-over-year improvement. You have middle-market outsourcing, which in the past has caused some upfront cost; and I guess your money market fee waivers are mostly recaptured.

Mike this is Todd. I'll take over the higher level to Gerald. In terms of I just want to remind you that the third quarter is a seasonally positive quarter to us, because we do our business and we indicated in my remarks that we would expect the revenue is associated with that business declined by $130 million in the fourth quarter and there are no real cost that basically a fixed cost business and there is no cost that come out as a result of that. So we -- and I'll also pointed out that the operating margin this is it's a -- it's high watermark for us, but not one that we would expect to see and more in new quarters, we expect to see it from the third quarter next year. So what we have done as we seasonally adjusted, we are grinding the operating margins up and we're seeing positive whatever we've done year-over-year basis, which I think is the way you have to look at this, because we did have some seasonality in our numbers. Gerald if you wanted to comment.

Broadly investment management side, I think we've said in our opening commentary and Mitchell alluded to it. We are running through the expense space, severance cost, restructuring cost, shutting down a business cost and the margin did in fact improve. We said publicly and Mitchell and I are both committed to it that we can improve those margins further. It does require a certain level of revenue mix, but we're not going to depend on that. So we think there is further opportunities to improve the core functions than leverage the scale and breadth of the rest of the trend, as well as making sure that they have - continue to have the investment process totally under the control and the investment management use. So we think there's better way to leverage the company, improve the margins and add business as well. And as I said, to Betsy's question, everything within operations and technology, investments we're making are paying off. You're seeing it in the positive operating leverage. I'm not going to change guidance from Investor Day, Mike. I know you keep asking me to do at each quarter, but I think we are fulfilling those goals and we are going talk to you this time next year about future goals for another three years.

Mike, I think you also have the question in there around fee waivers. And our view of fee waivers right now is what we have indicated before the fed move is that we saw a 50 basis point move with result in about 70% of the reduction in our fee waivers. Our fee waivers are indicator that we are running at about $0.60 a quarter. With the first 25 basis point more it look like we got about 50% of that so that is in our run rate. In the asset management business, the business has gotten a bit competitive so it has been slightly to those numbers. We would expect an additional 25 basis points or so to fulfill that 70% target that we had our estimate that we had previously given. So if its $0.07 a quarter, if we get another 25 basis point move, we would say there is probably about another 20% in there. So about $0.01 a quarter, as we will see another 25 basis points, so that’s probably - may be a little bit more if we go beyond that we've got a whole lot more.

And then I think I snuck in a question about middle-market outsourcing. In the past that would cause some upfront fees and you'd get the benefit down the road. Is that still the case?

That is generally that's the case, but as Brian and I both said we really want to make sure we have the right kind of client with the right kind of mindset in terms of kind of do more standardized work versus customize work. We do not want to take on business that will be long-term drag on our firm. So we go through a very, very robust analysis and we've had experience from these different mid-office outsourcing arrangements. So we are doing in a very disciplined fashion way.

Thank you.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Great; thanks very much. Maybe just to tag along on that question and tie it into the longer-term trend post-DOL. On the mid-office, the standardized versus the customized, obviously the T. Rowe deal and large deals like that tend to be more customized. Are you willing to look at taking on those big deals, or really going back to that more standardized strategy? And then do you think asset managers will essentially adopt that standardized strategy? Then also on the clearing side, I think, Brian, you mentioned some benefits longer-term from your business on DOL in clearing; if you can elaborate on that a little more.

Yes. So it's Brian, I'll start at the mid-office solution. So as Gerald mentioned, we really are taking the business discipline approach to this and we're making sure we're aligned with the assent management client and what they're trying to accomplishes with. What they're really trying to accomplish is lower variable costs, lower capital investment in technology, and increasing share economies to scale. So the best way to do that is to drive on what kind of an operating model, a platform that more than one client can leverage because that's where the benefits comes for us and all the clients. And so we are only getting into these in arrangements when we have the mindset of the partner is generally to get that enables us to create those share economy to scale. But they're also driving a technology platform strategy that's going to enable us to onboard these clients faster and make it easier for them to get the customized information and data they want. So we've talked a lot about NEXEN and we showcased to do longest to a number of hours including, I mean on this call. And basically NEXEN is an API-driven system and it enables the asset managers to get data they want, on demand, the way they need it. And so it's a much more effective way of helping clients get the customized information they want without creating customized development. And so that's going to be one of the ways we're into knowing meet asset manager need effectively without creating extra cost. We're also going to feel the speedy on boarding these clients in the future.

And then on the Pershing side?

Yes, on the clearing side, look we expect the Department of Labor Fiduciary Standard to drive more RIA activity. I mean people are going to shift from commission based to traditional brokerage business to RIA. That's set a significant trend for a long time. We expect it to accelerate. And so we expect a real growth in our RIA custody business and we are helping our brokerage-dealer clients who want to take advantage of the best interest contract and component of the Department of Labor Ruling. Pershing is developing the capabilities to help the clients comply which we think will initially help them, but we're also providing all the RIA custody and account tools and capability of any to ship their business much more toward the advisory model. And our RIA custody business is growing in double-digit in social revenue and in terms of AUC, so a pretty well position to take advantage of the shift that's going to happen in RIA market.

And you think that could be fairly immediate, like next year?

Well, it's happening already. It's been happening but it's accelerating. Yes, in the DOL rules in fact next year. So you'll see -- I think you're see real shifts in broker-dealer business models as a result.

Great. Then just a longer-term question for both Gerald and Mitchell, as we think about the active and passive trends. If they continue, how does that make you feel about consolidation or appetite for acquisitions there? I guess the question is: Do you think there will be more consolidation in the asset management industry? And do you think you can be a participant in that on the buying side?

Well, I do think there will be further consolidation. You just saw an announcement fairly recently because it's going to become a scale business like our servicing business. We continue to look at our boutiques and whether they have sufficient scale and feasibilities, virtually all of them do. And they are very strong in terms of their investment performance in the size and scale of what they can offer the marketplace. So I do think it's going to be a scale business. We're always mindful of looking at our portfolio the right way from a business and a shareholder perspective, so we'll see.

Just a little more color perhaps is that one thing I will just remind everyone is that on the passive side, let me just mention that it's about revenues and people talk about the assets on passive side. They don't make a lot of money, the margins on that. You're making 1 or 2 basis points and your operational risks are enormous. So that clearly is a scale business that you'll have a hand full of players consolidating into. On the equity side what you saw with Janus and Henderson, if you don't have good performance, you're not going to survive. So you're going to see a lot of third – fourth-quartile equity performers having to emerge or get out of the market that it's not sustainable. What I'm saying that, you know, active is going to continue to survive and thrive. We are largely in that space that we do have as I said, 18% exposure to the path inside and there are some cyclicality to it. We've been in a 7 or 8 year full market that favors indexing that when those markets start to lift and they will, active equity management, active management is going to do well again. So it's a mix story is what I'm saying. And I think we are nicely positioned for it and we'll see what opportunities come up and make sense giving where we're going with it all.

Great. Thanks for that color.

Our next question comes from new line of Brennan Hawken with UBS.

Good morning. Thanks for taking the question. I actually want to follow up on that RIA discussion briefly. We've seen increasing M&A and consolidation in the RIA channel. So when you think about going forward, one of the potential outcomes from DOL may be being a shift and a need for scale, a greater need for scale certainly amongst the RIAs, do you think or are you already seeing some of that consolidation leading to more negotiating power for some of your counterparties in that business, and then maybe either current or the potential for some pressure on those revenue yields and margins?

I think there will be consolidation in the retail advise business so one broker dealers need to shift towards an advisory model pretty rapidly. We’re providing them the tools to do that successfully and I think many of them will really made that pivot and succeed and they are deeply already on that trail. Some will struggle and I think there’ll be more consolidation in the broker dealer market as a result and to your point there may also be consolidation in the advisory market. Our model in the RIA market is more focused on larger registered investor advisory business so they’re not individual practitioners. We serve registered investor advisory companies and they tend to have groups of advisors and they tend to be larger advisors. So to the extent that there is consolidation in that space we think we’ll be a beneficiary because we tend to observe our average advisor in bigger and more likely to be an acquirer than not but although we’re not immune from the market forces that are out there.

Great. Thanks for that.

On the margins side I think they should be pretty steady. I don’t think we’re going to have fee compression in terms of competitive pressure. I think overall there is a broader base sort of change underway in advisor fees generally driven by a variety of factors including DOL, including the rise of digital advise and things like that which could put some downward pressure but if you look at the growth of assets and the growth of the wealth market overall I think that fundamental growth should offset some of the pressure on margins.

Okay, great. Thanks for that. Then for my second question, the spread improvement in sec lending, apologies if you hit this before, but I don't remember hearing it. Could you maybe break down how much of that was rate versus hard to borrow?

I think we benefit in the securities lending and the agency book on both of accounts. I don’t have an exact splint between the two but we did benefit from the higher LIBOR rates and some of the resets that come along with that and there were quite a few specials in the quarter where we did benefit so I would say it was a combination of the two, the specials probably being the greatest.

Okay. Thanks for the color.

I think we have time for one more question.

Out final question comes from the line of Brian Kleinhanzl with KBW.

Great, thanks. Just one question on the asset management and the flows in the LDI business. They were little bit lower than what they have been in recent quarters. But could you also remind us: How do those flows react when rates rise? Would that put less pressure on clients to use the LDI strategy?

A couple of things. First off let me just touch on the flow. The average flows per quarter last year were about 11 billion. This year I am sorry that this year they’re actually averaging 11 billion even though they were only 4 billion in the third quarter. They averaged 9 billion last year per quarter so from a average perspective we’re still seeing strong flow into LDIs and the pipeline is showing quite consistently, we see a pretty strong and consistent pipeline for the LDI business, number one. Number two, what you saw in the third quarter a little bit is the impact because so much of it is related to Sterling the 15% drop in Sterling has had a FX impact on what you’re seeing from the flows. With respect to the interest rate rise and its impact from a UK perspective we don’t foresee any interest rate rises and since the core of the business is where we really don’t see a significant impact there. The amount of business we have or we’ll start to have in the U.S. is fairly nascent so we don’t believe it will have a material impact on us as we start to enter new markets and grow quite frankly where there hasn’t been a lot of growth in the past. So we see it as still a significant opportunity for us irrespective of what happen to interest rates. With respect to interest rates we don’t see them moving that much.

The interest rates are a long, long way away from where they’re on a normalized basis than in pension funds all around the planet can’t get the returns they’re looking for to satisfy liabilities so I think this business still has a lot of legs to it.

With that I want to before closing the call first of all, thank you all for dialing in and your interest in us and of course you can have some followup questions with Valerie Haertel but I also want to encourage you to watch the premier the documentary Hamilton's America which is this Friday night on Public Broadcasting Systems Great Performance Series. It’s a biography of our founder Alexander Hamilton as seen through the lens of Lin-Manuel Miranda and he obviously created the hit shows Hamilton over a six-year period of time. I saw it the other night, it’s fascinating, it’s part of American history. I think you’ll be enthralled with it particularly if you are a history buff and interested in how the financial markets started and evolved so it’s a great documentary and I encourage you to watch it and of course we have sponsored it and we also believe that Alexander Hamilton’s inventiveness and vision is still part of the DNA of our company and we’re going to continue that legacy forward. So again thank you for dialing in today and I look forward to catching up you soon. Thanks everybody.

If there are any addition questions or comments you may contact Ms. Valerie Haertel at 212-635-8529. Thank you ladies and gentlemen. This concludes today’s conference call webcast. Thank you for participating.