DTCC Gives Industry An Overview of 2009 Technology Priorities
William Aimetti
DTCC’s 2009 Development Agenda, issued January 27, provides an overview of the organization’s major technology projects, organized by area of the business.
Themes in this year’s agenda include the expansion of risk management capabilities; the commitment to support customers globally; the addition of new services; the extension of existing services; and the modernization of core systems with an emphasis on standardization. The agenda also includes initiatives to help clients meet the increased demands of regulators. It will be updated quarterly.
To give customers perspective on the agenda, @dtcc spoke with William Aimetti, DTCC president and COO, and Michael Bodson, DTCC executive managing director, Business Management and Strategy.
To read the agenda, visit www.dtcc.com, click Thought Leadership, then click Development Agenda.
How does the Development Agenda reflect the current economic environment?
Aimetti: The main challenge in 2009 is to balance the pressures of the economic recession, which impact both our clients and DTCC itself, with the requirement to advance our clients’ needs while confronting competition in the equities clearing space in Europe and, potentially, in the U.S.
Some analysts project that technology spending by Wall Street firms will decline 20% this year, and another 30% in 2010. Because dollars are scarce, we are adjusting plans for certain projects that require customer investments. For example, we are moving ahead with the corporate actions reengineering but we are not requiring firms to make any technology investments or systems changes to accommodate this initiative in 2009. Our approach to technology always factors in the need to be flexible in changing circumstances.
What does the agenda say about DTCC’s strategic direction?
Bodson: Our strategic imperatives are defined by how we serve our clients and help them operate more efficiently, and the agenda highlights the technology piece of the equation as well as other areas such as Enterprise Risk Management. To deliver our value proposition, we are expanding our services, our client base and the geographic markets we serve. We are also looking for ways to strengthen the industry’s overall health at a very difficult time by exploring opportunities to centralize activities firms may now handle individually.
We have a relentless focus on lowering the industry’s overall cost of doing business with DTCC. And leveraging our community of clients, efficiencies, risk management capabilities and network not only brings DTCC’s at-cost model to more firms, it also spreads our relatively fixed expenses across a broader customer and product base, which drives down overall industry costs.
How does outsourcing fit into the picture for 2009?
Aimetti: In 2009, we will begin to reap the benefits of our new branch office in India, which we opened last year as an extension of our outsourcing strategy.
In the past, our technology partners in India sent key personnel assigned to DTCC to work in our U.S. locations. Now, from our India office, we will be able to manage the majority of those developers there rather than bringing them to the U.S., saving money and further improving productivity without impacting quality.
We are also looking for opportunities to outsource other business processing operations activities beyond the development work. We are leaving no stone unturned in terms of outsourcing, as long as quality and security would not be compromised. Our view is that outsourcing does not have to be offshore; it can be next door, as long as it makes business sense. We no longer need to own all that we do. We can work with partners to fill knowledge voids and better control our expenses.
Michael Bodson
What’s happening on the risk management front?
Bodson: DTCC’s risk management experience spans decades. Over the years, we’ve handled multiple participant closeouts, capped by the previously unthinkable Lehman Brothers failure and Bear Stearns bailout in 2008. The body of knowledge and systems we’ve built allowed us to successfully manage these highly complex and unprecedented situations with no loss to customers.
Now we are focused on lessons learned from those events to further strengthen our risk capabilities. We are conducting a hard-nosed assessment of our practices and policies to understand what went well and what could have been done more effectively. We need to understand how we can better protect the industry, and meet our regulatory obligations in a manner that is cost- and capital-efficient for our clients.
In the over-the-counter derivatives space, we are already expanding our capabilities based on lessons learned by the industry and Deriv/SERV during the crisis. And in our equities clearing business, we are moving to a real-time trade guarantee, tightening the current midnight of T+1 guarantee. This marks a significant change that will reduce credit exposure for trading firms and systemic risk across the industry.
In the fixed income world, the launch of the MBS CCP [mortgage-backed securities central counterparty] is a major industry move into finally having a true central counterparty capability for this market segment. In the Lehman event, we learned how critical this capability is in maintaining orderly market conditions.
An additional development is that firms are reexamining the risk they are willing to take. In general, our clients want to take on risk they can manage, which is primarily market risk. They do not want to assume credit risk when it comes to operational issues. That is what DTCC does better than anyone else.
Aimetti: Another trend is the buyside’s increased interest in DTCC’s risk mitigation services, which have benefited the sellside for decades. Until now, many buyside firms didn’t pursue DTCC membership because they didn’t want to set capital aside to meet our collateral requirements. However, the Lehman collapse highlighted to them the risk management benefits inherent in what we do every day.
When Lehman went down, our subsidiaries guaranteed the Lehman trades of our members, but non-members had to manage the counterparty risk and unwind their Lehman positions on their own. Following that experience, more buyside firms want to tap into the risk mitigation DTCC offers. For our part, we are taking the regulatory steps necessary to expand our client base to the buyside of the industry.
DTCC recently pushed its equity processing capacity to 500 million transactions a day. Any further expansion plans for 2009?
Aimetti: Last year, on our peak day, NSCC processed 315 million sides. I would like to reach the capacity to process two-times peak. We are now upgrading our mainframes to IBM z10 models, which are faster and have more memory than the previous model. I expect that in the second quarter, we will increase capacity to at least 600 million sides.
It’s also important to remember that, on any given day, we have flexibility to process beyond the levels set in our service level agreements with customers. If needed, we have various mechanisms at our disposal to ensure seamless handling of record volumes.
For example, we could turn on more engines to boost capacity or we could extend the timeframe for completing processing.
Does the Development Agenda reflect Nasdaq’s announced entry into the U.S. equities clearing space?
Bodson: There are really two parts to this answer. First, there are initiatives we had planned all along that will improve the equities clearing process, projects we would have undertaken regardless of Nasdaq’s announcement. These include the move to a same-day trade guarantee and the addition of a new service, the Obligation Warehouse, to automate ex-clearing obligations, which will allow customers to reduce their internal cost structures.
Beyond our clearing capabilities, DTCC derives a competitive advantage from ongoing initiatives that contain costs, streamline operations and improve customer satisfaction. To drive these efforts, we rely on metrics-based methodologies such as Six Sigma, ITIL [Information Technology Infrastructure Library] and CMMI [Capability Maturity Model Integration].
In our core businesses, we have turned in strong performances for the past several years, steadily driving down costs while volumes grew sharply. For instance, in the equities clearing business, we cut expenses by 10% per annum over the past five years while dealing with a higher than six-fold increase in volumes – and we pass along these savings to customers. At a total net cost to the industry of less than $100 million per year, or approximately $250,000 per average firm, equity clearing, with all its risk mitigation and highly redundant systems, is an excellent example of DTCC’s value proposition.
Second, once we obtain more detailed specifications from Nasdaq, we may have to undertake additional work to deal with what potentially will be a bifurcated clearing environment. How this will work is yet to be determined and the amount of work to be done to support such a development will need to analyzed once we have a clearer picture of what Nasdaq plans to do.
What does DTCC’s CMMI Level 3 certification, achieved in 2008, mean for customers? Any plans to go for Level 4?
Aimetti: CMMI certification means an organization has enterprise-wide standards for designing and delivering technology applications. DTCC is the only U.S. financial services organization to have achieved CMMI Level 3 across the entire enterprise.
For customers, the end result is that technology projects are completed on time and within budget. Solutions come out of our testing environment with fewer defects, resulting in less rework and lower costs, which translates into savings for customers.
This year, we will further strengthen our processes by moving toward CMMI Level 4 with a Class B assessment, which will tell us where the gaps are in terms of moving to Level 4. That will set the stage for obtaining a Level 4 certification, which we expect to take about 18 months to complete.
DTCC’s drive to continually improve its technology organization is another indication that we are listening to customers and implementing processes that improve effectiveness on the technology front.
Does the tough economic environment present DTCC with opportunities?
Bodson: The current environment creates two significant opportunities for out-of-the-box thinking about DTCC’s role in financial services.
The first pertains to the new U.S. administration’s focus on making fundamental changes in the regulation of financial institutions and instruments. In response to the call for greater transparency, we are working with regulators and customers to explore ways we can increase marketplace transparency by leveraging the information we safeguard for the industry.
We’ve already begun to meet this need in the market for credit default swaps [CDS]. As of November, we release weekly information on the open CDS contracts stored in our Trade Information Warehouse. These reports provide a global view of CDS activity, giving the entire marketplace a much clearer understanding of outstanding positions and exposures than was previously available. It is important to emphasize the reports do not disclose our customers’ confidential trading information.
With Lehman, we saw how the absence of data fueled wildly inflated claims about the magnitude of the exposures. That type of misinformation increases the stress on the marketplace and can lead to poor decision-making across the board. We believe that DTCC’s publication of accurate, timely CDS information has brought a calmer and more informed approach to trading in these instruments, and to the financial media’s reporting about them.
The dire state of the economy also presents an opportunity to strengthen the industry’s operating model. There is no time like a crisis to get the calm heads around the table focused on rethinking our fundamental approach to the industry. At this point in the history of the markets, it may be time to break from the past and make some significant changes to drive down costs and further increase efficiencies. Given where DTCC sits at the nexus of the financial services community, with our network, connections, track record and reputation as a trusted provider, we want to talk with market participants and assess whether there are any transformational actions we should be taking given the current environment.
We’ve asked employees to look at their product areas from the regulatory perspective and in terms of the industry’s operating model. The mandate is to ask questions and think creatively. Are there capabilities we should be leveraging? Are there opportunities we have not examined? Should we be opening a dialogue either internally or externally to explore possibilities? In doing this, we want to be as coordinated as possible with the industry. The goal is to brainstorm, share ideas and ensure we are consistent and focused on these matters as we go through the year.
Beyond spelling out DTCC’s technology plans, what does the Development Agenda tell the industry?
Aimetti: The agenda gives customers a clear indication of DTCC’s strategic priorities. It also underscores that DTCC is here to listen. We want to take on and execute technology projects that will serve the industry; to build solutions that are right for our customers. We want to hear their concerns, issues and priorities, and to be responsive.
Bodson: The agenda also underscores that, in DTCC, the industry has built a powerful, highly effective machine and community of users. Our goal is to leverage this machine every single day to the extent possible, in the service of our customers.@