DTCC Connection

May 16, 2017 • DTCC Connection

Profile: A Discussion with DTCC’s Thompson

By Mike Scotti

A Discussion with DTCCs Thompson
Larry E. Thompsonis Vice Chairman of DTCC and Chairman of the Board of DTCC Deriv/SERV LLC

The career of DTCC’s Vice Chairman Larry Thompson has placed him at the center of a number of high profile events in the financial industry that required leadership and keen decision making. Last month, Markets Media recognized Thompson’s many contributions by bestowing its “Lifetime Achievement Award” upon him at a black-tie gala in New York.

Over the course of more than three decades at DTCC, Thompson has been a central player in some of the most significant issues impacting the financial markets. From the Northeast blackout to the Lehman Brothers bankruptcy, the Knight Capital trading incident and, of course, the terrorist attacks of 9/11, Thompson has played an important role in securing the safety and integrity of the system when the marketplace was in crisis.

While that alone is a record worthy of honor, Thompson has also helped advance high-profile initiatives that have improved market structure and reduced risk for industry participants, including shortening the U.S. settlement from T+5 to T+3 and, soon, T+2, the move to same-day funds conversion and the merger of the Depository Trust Co. (DTC) and the National Securities Clearing Corp. in 1999, which created today’s The Depository Trust & Clearing Corp.

Thompson joined DTC in 1981 as Associate Counsel. He rose through the ranks in the General Counsel’s Office before reaching the top position in 2005. He stepped down as General Counsel in 2017 to focus on his responsibilities as Vice Chairman of the firm. In this role, Thompson provides advice and guidance to the senior management team, leads our public policy engagement with key supervisors and lawmakers in all parts of the world and serves as a chief spokesperson for DTCC at events and conferences and with the media.

In addition, Thompson is also Chairman of the Board at Deriv/SERV, DTCC’s derivatives business. He has been a strong proponent for greater standardization of data in the derivatives market and believes that new technologies, such as distributed ledgers, could create a more efficient system for derivatives processing. DTCC has been at the forefront of advancing the use of distributed ledger technology (DLT) into the post-trade process.

DTCC Connection recently spoke with Thompson to discuss a number of issues – from insights into DTCC, its employees, to the important role the firm will continue to play in the evolving post-trade process.

Wall Street Opened

Of all the high-profile industry incidents he’s been involved in, September 11, 2001 will always be etched in his mind. “The work of management and employees after the 9/11 attacks stands out as my proudest moment at DTCC,” Thompson said.

All eyes in the securities industry were focused on DTCC that day. The markets closed following the attacks and would not reopen until the following Monday. But there was a backlog of trades from the previous three days that still needed to clear and settle. DTCC employees worked throughout the week – in the most trying of circumstances – to ensure that all trades had gone through the post-trade cycle. “We really made it possible for Wall Street and the exchanges to open a week later,” he said.

Duty and loyalty are two words that come to mind in describing the actions of DTCC employees during that difficult week – many had friends, relatives or neighbors in the Twin Towers and lower Manhattan was devastated. “We do a public good and work extremely hard at our jobs,” Thompson said. “DTCC is made up of a unique group of people who take great pride in pulling together and doing the right thing. It’s always been like that.”

Transparency & Standards

Thompson has been leading DTCC’s efforts to increase transparency in the global OTC derivatives market, working with policymakers in the U.S., Europe and Asia on the nuances of trade reporting and the importance of harmonizing rules globally. Today, about 90% of jurisdictions are reporting their trades to a repository, he said.

Still, Thompson continues to press for greater transparency on a global basis, explaining that regulators need to understand the wider risk exposure of an institution across jurisdictions. “We’ve made a fair amount of progress bringing transparency to the OTC derivatives marketplace, but we haven’t achieved the full level of transparency we’ve been looking for,” he said. “There’s still more work to do to ensure regulators have access to the information that need to monitor and mitigate the build-up of risk in the system.”

For credit derivatives swaps (CDS), transparency is high because DTCC’s Trade Information Warehouse, with 98% market share, shows a clear picture of trading activity.

Approximately 52 regulators have access to the CDS information, and about one-third of them use it on a regular basis, Thompson said. “The information in the Trade Information Warehouse supplements other information the regulators have, so there is a great deal of transparency into the CDS market,” he said. “Our goal is to bring them the same level of insight to the other OTC asset classes.”

On the question of data standards, Thompson said there has been ongoing discussions among regulators to harmonize information between markets and to make it more granular. He added that by making data standards common, the information can be enriched with data from other sources to make it more insightful and actionable.. “There is momentum in this area,” Thomson said. “I’m encouraged by what I’m seeing, but we still have a long way to go.”

Thompson delivered a keynote address on standards and innovation in Frankfurt on March 29. The event was by the U.S. Treasury Department’s Office of Financial Research, the European Central Bank and the Bank of England Joint Workshop. In his speech, he pointed out that standards and increased transparency will only occur through a foundation of industry collaboration.

Collaboration

With the move to T+2 settlement in the US set for September 2017, DTCC has been a leader in this move, Thompson said. But to get to this point, there has been a tremendous amount of collaboration with the industry, and in particular, the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), he added.

Collaboration is a hallmark of DTCC and is at the center of its approach to reducing risk and costs for the industry, while enhancing efficiencies. Thompson explained why:

“That’s how we’ve always worked here. Our client base and our members are our owners, so they have to be fully aligned with what we do. We’re collaborative with our clients to come up with solutions. There has to be buy-in from the industry in order to come up with solutions. Their input is important because it is also an acknowledgement that we sometimes don’t have all the answers how a problem should be solved.”

The Future

This collaboration continues in DTCC’s quest to recreate the post-trade process through innovative thinking and the use of DLT. Quarterbacking this effort both internally and externally is DTCC’s Office of Fintech Strategy.

Thompson pointed to a number of areas DTCC has been active in pushing the innovation envelope. The firm is a founding member of the Linux Foundation’s Hyperledger Project, which is an open source group that is advancing DLT.

In addition, DTCC and Digital Asset Holding’s proof of concept work in the repo-market has successfully completed Phase One and moved to Phase Two. Using DLT, the firms are finding ways to better manage the netting process of U.S. Treasury and Agency repurchase agreements. This next step includes a working group of industry participants.

Another DLT project is DTCC’s work to re-platform its Trade Information Warehouse. Like any project DTCC undertakes, the goal is to streamline, automate and reduce processing costs.

The cornerstone of expanding DLT, as well as other technologies like artificial intelligence (AI) and robotics, will be greater standardization, Thompson said, explaining that the industry needs to do that to increase efficiencies and lower costs.

And he expects DTCC to be there working with the industry, playing an important role as a trusted partner. “Since I’ve been at DTCC,” Thompson said, “it always seems that we’ve found a way to reinvent ourselves every five years, and we’ve done it in response to solving the industry’s pain points.”

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