DTCC Cuts Fees Again for 2008
“For customers using our core services, the message is that year on year, your absolute and unit costs are decreasing.” --Michael Bodson, DTCC executive managing director, Business Management and Strategy DTCC has cut fees for the second time in 2008, with the new prices taking effect July 1. These latest cuts, reflecting surging volumes and DTCC's tight financial management during the first half of the year, come on top of the organization's largest-ever fee reductions announced in January.
"With the latest fee reductions, it is an opportune time to address a misperception some firms have about the net cost of doing business with DTCC," said Michael Bodson, DTCC executive managing director, Business Management and Strategy, noting that this topic is particularly relevant given tough market conditions.
There are two components to customer costs. "While fees represent the initial billing for services, the actual cost borne by our customers is the net amount paid after rebates and discounts," said Bodson. "Fees are a means of tracking usage and allocating our costs to customers."
He added, "When DTCC reduces the fees charged for services, it reflects our efforts to keep customer costs aligned with actual usage of the services." The combined January and July reductions, projected to total approximately $222 million in 2008, are consistent with this objective.
Bodson explained that DTCC continually reduces the costs of its core services by controlling the fixed cost associated with its processing capacity and seeking to put through higher levels of usage via volume increases or product expansion, which yields unit savings thanks to economies of scale, and by reducing absolute costs through rigorous internal expense controls.
Change to discount policy
"This year, to give money back to customers faster and help them accurately capture these returns in their P&Ls, we are making some changes to our refund policy," Bodson said.
FICC and NSCC's businesses pay out monthly discounts, with any remaining amounts disbursed in a lump-sum in March of the following year. The refunds are issued on a pro-rata basis, based on customer usage of the discountable services.
"For these businesses, we now have a policy that returns any revenue above a 25% margin the following month," said Bodson, noting that in the past, the margins were not fixed. "Getting the money back to our customers sooner enables them to properly account for returns in the right periods, more quickly."
Setting the margin at 25% also will reduce the annual rebate paid the following March. What's more, DTCC will make this annual rebate process more transparent for customers by providing earlier communication about it.
"This year, we plan to give customers an estimate of their annual rebate in December, so they can better accrue for it before they close out their year-end books," said Ellen Fine Levine, DTCC's CFO.
For DTC, the current policy is to pay out the entire rebate once a year in March of the following year. "We are working on establishing a process that would also return excess revenue monthly, thus reducing the annual rebate," noted Levine.
Changes to 2008 Fees
DTCC traditionally adjusts fees annually, effective the first business day of January. This year, the additional cuts take effect July 1. The changes decrease the unit-based NSCC Equity Trade Recording and Netting fee by a projected $25 million on an annualized basis, for a 15% reduction in overall Clearance fees. FICC's Real-Time Trade Matching (RTTM) fees for corporate, municipal debt and unit investment trusts (CMUs) has been cut by a projected $6.5 million on an annualized basis, for a 26% overall reduction.
In addition, NSCC's year-end discount will now include this CMU service, which was previously excluded from the discounting process because it had not fully recovered its investment. These revenues will be included in the allocation of any 2008 discounts and rebates given by NSCC for transactions submitted on or after January 1, 2008.
At-cost model
In addition to lowering unit costs through the benefits of scale, DTCC continually reduces its expenses in the face of double-digit annual increases in processing volumes, passing the savings along to customers. Rigorous financial management plus metrics-driven initiatives such as Six Sigma, Capability Maturity Model Integration (CMMI) and Information Technology Infrastructure Library (ITIL) contribute to ongoing cost-cutting.
For example, for DTCC's mature businesses, such as equities clearance and settlement, fixed income clearance and settlement, mutual funds, underwriting and reorganization services, corporate actions processing and custody, which account for 83% of what customers spend with DTCC, 2007 controllable operating expenses were cut by 5% to $449 million from $473 million. Meanwhile, 2007 volumes significantly increased across the businesses ranging from low double digits to 59%.
The 59% volume increase was in NSCC's clearing business, where volume processed in 2007 grew to 13.5 billion transactions vs. 8.5 billion in 2006, while operating expenses remained flat over 2006. For example, equities clearing cost-per-side was $0.006 in 2007, almost half of the $0.011 cost in 2006. The cost of equity clearance for the entire U.S. market is still below $100 million per annum. "Most market participants estimate a cost figure that would be multiples of that when asked to guess," Bodson pointed out. "It is important they understand the value/cost proposition in clearance, especially given the massive daily volumes that are processed by NSCC."
For DTCC's other traditional business lines, the trends are similar with lower expenses being matched by rising volumes.
Bottom line
"For customers using our core services, the message is that year on year, your absolute and unit costs are decreasing," said Bodson. @