The BDUG keynote address by Robert McGrail, DTCC executive managing director, Domestic and International Core Services, covered risk in the markets generally; how DTCC manages financial and operational risk; ongoing efforts to reduce customers’ cost of doing business with DTCC; and an overview of the business. Below is an excerpt from his remarks, delivered September 14.
For the last several years – beginning well before the credit crunch hit a year ago – we have been deeply involved in testing and revamping our risk management systems. We stress test our risk systems to determine what kinds of exposures we’d have to deal with under severe market conditions. Every three months, in fact, we evaluate our exposures in the context of a market move comparable to the 1987 market crash. We use the results of these tests to understand how effectively we could handle such a major market downturn today. In today’s volatile markets, risk management is crucial to our member firms. It’s what allows traders to do what they do and then go home and sleep at night.
We also regularly put our systems through “war games” that simulate the possibility that one of our member firms is failing. This requires us to go through the steps we would have to take to respond to such an event. As it turned out, this critical component of our risk management process proved prescient….
The other kind of risk we have to address, as you know, is operational risk. No one wants to incur a loss because of some failure in an operation or a procedure. The recent market turmoil, for example, has been accompanied by torrential trading volumes. At DTCC, we currently operate and maintain live data and business links within U.S. markets with 51 sep-arate alternative trading systems and nine individual exchanges. So we clearly need to be able to cope with unanticipated surges in trading volume.
For equity trading, the volumes coming through all those links are extremely high. Last year, we handled 6.75 billion equity trades – or 13.5 billion sides. Just three months ago, we processed a record 198 million billable equity sides in a single day for the U.S. market. [Editor’s note: Since McGrail spoke, NSCC set a new daily processing record. See article, "DTCC Processes Waves of Surging Equity Volume".]
We’re always looking for ways to reduce fees so that we can not only give you money back, but give you more than before. We’re also looking at ways to get this money back to you faster than ever before.
This year, we made our largest fee cut ever. By the time the year is over, we expect to have given more than $220 million back to our customers in reduced fees. For next year, we’re anticipating an additional net fee reduction of more than $70 million.
The reasons behind this are simple. First, if we can reduce our operating costs and achieve economies of scale from rising volumes – and we have been able to do both – then you should get your money back. Secondly, when we’re in a position to give it back, you should get it back ASAP.
As I think you know, when we reduce fees for services, it reflects our efforts to keep customer costs in line with the actual use of a service. If volumes surge and we can achieve greater economies of scale, we want to move those savings back to you. That’s why we pay refunds.
Our goal is to return funds to you promptly so that they can be recorded for the year in which they were paid. In that way, your bookkeeping – and ours – will more accurately reflect the actual costs of doing business.
It’s been our practice to refund excess fees monthly to the clearing corporations, and if there is a final refund for the year, that is sent by the next March. But this procedure doesn’t always get money back to you soon enough. As a result, total refunds for a calendar year aren’t always reflected in your P&L. Instead, they often end up being recorded on the next year’s records. And so the distortion from one year gets carried over into the next.
To avoid that as much as possible, we now return any revenue above a targeted margin level to our clearing participants on a monthly basis. We hope to speed up end-of-the-year returns as well. And we’re working to institute monthly discounts for depository users too.
The fact is, we are the lowest-cost trade processor in the world. And we intend to retain our title as the lowest-cost provider, even as we step up our efforts to manage and mitigate risk in an ever-broader and more challenging environment. @
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