Andrew Gray, Managing Director, Core Business Management for DTCC, recently spoke with @dtcc about the status of new initiatives and corporate priorities, the restoration of DTCC’s vault following Superstorm Sandy and DTCC’s plans for addressing some of the top challenges facing our clients and the global financial services industry.
@dtcc: How would you describe DTCC’s performance so far in 2013?
It’s certainly been busy and productive, and I am pleased to say that we performed very well, having made excellent progress against a number of corporate goals. Many of our top initiatives continue to advance in our businesses, as well as in newer business lines like the Global Trade Repository (GTR) and CICI Utility, our LEI solution. [The CFTC Interim Compliant Identifier (CICI) Utility was created by DTCC and SWIFT as the interim solution for the Global Legal Entity Identifier (GLEI) solution.
Andrew Gray, Managing Director, Core Business Management
@dtcc: Can you highlight some of the top initiatives?
While remaining fully committed to our mission to protect the capital markets, mitigate risk in the financial system and foster greater efficiency for our clients, we are also focused on developing solutions to meet new needs and opportunities.
In our Settlement and Asset Services business we have made significant progress with our Corporate Actions Reengineering Initiative. We began distributing ISO 20022 announcement messages in November 2011 after a successful pilot with four leading corporate actions users. More than 30 clients are currently in the process of programming for the messages or are already processing the messages in their production environments. The number of corporate actions messages we have distributed recently surpassed the 100 million mark.
In our Clearing business, we implemented a new platform to replace the legacy system that clears the bulk of trades in our Government Securities Division. By eliminating the existing volume cap on handling these trades, it will reduce operational risk and raise the system’s capacity. It will also enable us to handle a government delayed payment in the event of a debt ceiling issue arising again, which is a direct response to requests we received from our regulators. In addition, we are working with the clearing banks on tri-party reform enhancements and once these are fully, GCF Repo settlement will be reduced by 76% on average, with a potential for over 92% reduction on certain days. This reduction reduces systemic risk related to tri-party settlement.
We are strengthening our equity clearing services to protect our members and our organization with the upcoming modifications to our platforms for the settlement of Automated Customer Account Transfer Service (ACATS) obligations that are eligible for CNS (continuous net settlement) and/or DTC settlement. The modifications will allow us to effectively manage the reversals of ACATS obligations in the event of a multiple member default.
Our collateral management initiative is making headway as we continue to focus on developing a margin transit utility that will help reduce risk and improve market efficiencies and as we advance our collaboration with Euroclear.
As for our Wealth Management Services Alternative Investment Products offering, the level of interest in the product and our client base continues to grow. We are also working towards completing our redesign which will enable greater volumes, with PSE (Participant Service Environment) implementation targeted in December and System Integration Testing having been initiated. We expect the newly redesigned system to be placed in Production in February 2014.
@dtcc: How is the Legal Entity Identifier (LEI) or the CICI utility initiative progressing?
The CICI utility is the first step of a longer-term platform for a global LEI. The utility creates and assigns unique identifiers to any financial organization that engages in a transaction, and stores and validates the accuracy of the associated reference data. CICI’s, or what is currently referred to as pre-LEI’s, will transition to LEI’s once a global solution is in place. In the US, the use of a pre-LEI to meet Dodd-Frank trade reporting requirements is fully operational for OTC Derivatives. As of August, 2013, more than 90,000 CICIs have been issued to legal entities from over 140 jurisdictions, the majority of which will transition to LEI codes following global acceptance by the Regulatory Oversight Committee (ROC).
To make sure CICIs can be used for reporting to all global regulators we are working closely with the industry to enhance the CICI Utility to comply with recent ROC guidance for global acceptance of pre-LEIs, as well as guidance from the CFTC. Also, we have partnered with CUSIP Global Services to allow issuers to simultaneously apply for both CUSIP numbers and interim LEIs from a single source, making adoption and maintenance of pre-LEIs much more seamless and ubiquitous.
@dtcc: We are approaching the one-year anniversary of Superstorm Sandy. Can you give an update on the status of DTCC’s vault and the recovery of certificates that were damaged during the flooding?
As you know, the storm affected many businesses in the New York Metropolitan area, including DTCC. Our business continuity strategy enabled us to maintain operations and continue processing securities during the week after the storm, but we were impacted by flood damage to our lower Manhattan headquarters and our securities vault. Since then, an unprecedented effort has been underway to restore and reconcile more than 1.7 million certificates that had been damaged by the storm. We are in the final stages of completing what many consider the largest certificate recovery effort ever attempted in history. It was an extraordinary feat by a team of dedicated individuals who helped us make such remarkable progress in a short amount of time.
@dtcc: Turning to recent corporate transactions, can you explain the strategy behind the EMCF and EuroCCP deal and the Global Corporate Actions (GCA) Validation Service sale to Markit?
Combining EuroCCP with EMCF will create a new CCP that will leverage the strengths of each organization to deliver greater efficiencies and sustainable competition to the pan-European equity clearing market place. The combined firm will provide best practices in a number of important areas, including risk management, technology, settlement and client service. The sale and purchase agreement for the transaction has been signed by us and the other shareholders in the new entity: ABN-Amro Clearing Bank and NASDAQ OMX, owners of EMCF and BATS Chi-X Europe We have also submitted a formal filing to the competition authority in the UK and we expect to get feedback in the fall.
The sale of our GCA Validation Service to Markit NA on July 1 represents a strategic fit for GCA VS clients, as it provides them with continuity of best in class service and support while offering them access to a broader array of complementary services from Markit.
@dtcc: What was the driving force behind acquiring full ownership of Omgeo, which had been a DTCC/Thomson Reuters joint venture for the past 12 years?
The transaction will enable DTCC and Omgeo to drive a unified global strategy for post-trade processing and settlement. It will facilitate increased collaboration among the buy-side, sell-side and custodian communities around key risk and cost reducing industry initiatives including the move to trade date affirmation, settlement matching in DTC, and the adoption of shorter settlement cycles in various markets.
@dtcc: How are we balancing the goal of strengthening DTCC’s core products with implementing new products like GTR and LEI?
Strengthening the core and implementing new products are not mutually exclusive. We absolutely must continue to ensure our core clearance, settlement, asset services and data businesses are as robust as possible and are keeping up with the changes demanded by the industry.
In addition, these services act as the basis for getting into new businesses in the future. GTR and LEI, along with initiatives like collateral management and Global Middle Office (GMO) utility, all build on strong existing capabilities. However, we do have a challenge in that we need to prioritize projects because there is only so much we can do at any moment and we do not have unlimited resources. Over the last few years, we have done a better job of improving our discipline around project and initiative governance and prioritization.
@dtcc: Whom do you see as DTCC’s biggest competitors both in the U.S. and globally?
Historically, since the consolidation of clearance and settlement infrastructures in the U.S., DTCC has not faced a great deal of competition, particularly for its core U.S. clearance and settlement services. However, we can’t afford to be complacent as we have seen attempts by other firms to enter our core space. In European equity markets, we operate under a highly competitive clearing environment, and robust competition is growing in our trade repository services. And Omgeo operates in a very competitive environment as well.
Thus, we need to continue instilling a commercial mindset across the organization, providing the best possible service at competitive price points, along with placing an even greater emphasis on listening to our clients and partnering with the industry to develop innovative solutions that drive down costs and mitigate risk.
@dtcc: What lies ahead for DTCC for the remainder of 2013?
There are several important initiatives and priorities on which we are focusing.
The Treasury Market Practices Group recommended late last year that forward-settling agency mortgage-backed securities transactions be margined in order to prudently manage counterparty exposures. Scheduled to go in effect at the end of 2013, DTCC has been partnering with buy-side and sell-side firms to prepare for the introduction of margining in an effort to work towards a single protocol for processing these transactions.
Second, after spearheading an in-depth analysis on accelerating settlement, we are preparing to recommend a transformational move to shorten the settlement cycle for U.S. equities transactions. Shortening the settlement cycle will significantly reduce risk exposure, enabling firms to optimize their capital and create greater processing efficiencies. These are critical areas of concern for the industry.
Third, we are moving forward with implementing DTCC Limit Monitoring, a new risk-monitoring tool that will help clearing firms manage exposure of their correspondents’ and their own equity trading activity. It’s designed to deliver message alerts for both early warning and breaches of limits established by clients, which will strengthen their risk management frameworks. We are leveraging our aggregate equity trading information to give our clients unprecedented post-trade insights in near-real-time. We are aiming for an early 2014 go-live date, pending regulatory approval.
As part of our on-going commitment to protecting the integrity and soundness of the marketplace, we’ve initiated an important multi-year process that aims to reduce the chance of a disorderly failure and severe systemic disruptions for DTC, NSCC, and FICC, our three subsidiaries designated SIFMUs (Systemically Important Financial Market Utilities) by the Financial Stability Oversight Council (FSOC). As a first step, we’ve developed a high-level resolution framework for the Recovery and Resolution (R&R) Plans for each of these subsidiaries, which includes analysis of R&R scenarios and strategies along with business and risk profiles, a comprehensive overview of these three critical operations and all of the recovery options currently available to handle periods of heightened stress to us and our members.
And fifth, we continue to place great priority on dematerialization in the US capital markets.
@dtcc: Thank you for your time. Do you have any final thoughts you’d like to share?
DTCC is committed to helping our clients manage through this period of significant change for the markets by working collaboratively across the industry to mitigate risk, enhance transparency and reduce costs. We recognize that firms have made substantial costs reductions over the past 5 years and that market infrastructures like DTCC have an important role to play in helping them return to higher levels of profitability. Many of the key initiatives we have underway will leverage our infrastructure to “utilize” certain processes that do not generate revenue or provide firms with a competitive advantage. We believe the potential cost-savings and risk reduction benefits could be significant. We are excited by the opportunities in front of us and look forward to extending our reach and impact in the industry.