DTCC Previews The Year Ahead
Andrew Gray, DTCC managing director, Core Product Strategy and Management, recently met with @dtcc to talk about some of the ways DTCC is working with customers to meet their needs in today’s changing industry environment.
What are the major industry trends that have an impact on DTCC’s strategy and planning?
Many of the trends we see this year are an extension of last year’s trends.
Regulatory involvement in financial services is increasing, and the focus on issues such as “too big to fail” will have major implications for the industry. Risk management remains a priority, with firms looking for ways to reduce risk and the capital requirements associated with managing it. Our customers’ continued drive to cut costs and increase efficiencies is another theme. While some financial institutions had a good year in 2009, in general, firms are concerned about their margins, particularly in light of the new regulations that are likely to come.
What do these developments mean for DTCC?
The financial crisis has actually contributed to increased awareness of DTCC’s role in the industry and the value we add to financial markets. Regulators, along with our clients, are looking to DTCC to help them better understand and mitigate risk, and to increase marketplace transparency. Our Trade Information Warehouse is one example of how we already contribute to these objectives in the over-the-counter [OTC] derivatives market.
– Andrew Gray, DTCC managing director, Core Product Strategy and Management
In addition, at a time when margins are being squeezed, DTCC’s track record for reducing the industry’s costs resonates with customers in both the back and front offices.
Given this environment, we are working closely with clients to explore oppor-tunities for further leveraging our systems and information to help them manage risk, address regulatory obligations cost-effectively and efficiently, and improve competitiveness.
We also are being more proactive in communicating with regulators and legislators to inform them about DTCC’s capabilities. For instance, to underscore how the Trade Information Warehouse can help mitigate risk and deliver transparency in the OTC derivatives market, DTCC executives have testified before Congress and conducted briefings with regulators, congressional staff and industry groups. And as we set out to tackle these and other challenges facing the industry, DTCC’s reputation as a trusted, at-cost, neutral provider is a tremendous asset.
Could you cite some examples of how DTCC will address the industry’s needs in 2010?
In the equities business, we have several initiatives that will reduce cost and risk, address new regulatory requirements, streamline processing and improve overall efficiency.
On the regulatory compliance front, we are creating a new version of our Cost-Basis Reporting Service to help firms meet a mandate to report the movement of cost-basis information between broker/dealers, transfer agents, issuers, mutual funds and custodian banks in a standardized, secure electronic environment. This is an example of DTCC leveraging existing capabilities to help firms meet regulatory requirements quickly and without making large capital investments.
To reduce cost and risk in the U.S. equities market, we are launching the Obligation Warehouse, which will allow broker/dealers to submit ex-clearing fails and other open obligations for real-time matching and confirmation. Now it is done manually. The new system will also give brokers real-time access to their fails data, and perform reconfirmation and repricing on a more frequent basis than at present, which is done quarterly. We also expect a growing number of broker/dealers and custodian banks to adopt the ID Net service to reap the financial savings of institutional netting. ID Net allows brokers to combine their affirmed institutional equity trades with their broker-to-broker trades in NSCC’s Continuous Net Settlement [CNS] system.
Another important initiative, which is awaiting regulatory approval, is our proposal to move the equity trade guarantee to trade date, compared with the current midnight of T+1 guarantee. This change will reduce our customers’ credit exposure, as well as systemic risk across the industry.
We also are developing the Universal Trade Capture system, which will centralize existing equity trade-capture applications in a single validating and reporting engine, giving customers standardized output for all trade data.
In the European equities space, our EuroCCP subsidiary will expand to other markets and instruments. For example, we plan to begin clearing U.S. equities that trade in Europe, including stocks, exchange-traded funds and American Depositary Receipts. In addition, we recently published a white paper on reducing risks among interoperating central counterparties [CCPs] in Europe and continue to participate in industry discuss-ions on this important issue, with the goal of giving customers greater choice of providers.
What about fixed income?
We are waiting for regulatory approval to launch the new CCP for mortgage-backed securities, which is key to reducing risk and cost in this market. We’ve been working closely with regulators to address their concerns and, in the interim, we continue to operate the CCP service in a pilot program.
We also plan to launch New York Portfolio Clearing [NYPC], our proposed joint venture with NYSE Euronext for clearing U.S. fixed income derivatives. This new company will bring enormous benefits to the industry and expand DTCC’s footprint into a new asset class: futures. NYPC will mitigate systemic market risk by providing a new level of market transparency, and it will reduce capital requirements by allowing firms to use single-pot margining across multiple asset classes, in this case the cash and derivatives markets. The launch of this joint venture is also subject to regulatory approval.
What is happening on the OTC derivatives front?
Our Trade Information Warehouse is solidly established as a key global provider in the OTC derivatives market, serving as a global repository and asset-servicing platform for credit default swaps. We have significantly increased transparency in this market, working with customers and regulators to publish information on contracts stored in the Warehouse. A recent development is that we received approval from the Federal Reserve Board to create a new DTCC subsidiary called the Warehouse Trust Company LLC that will operate the Trade Information Warehouse and be part of the Federal Reserve System. This change will bring even greater transparency and risk mitigation to the global OTC credit derivatives market.
The Warehouse also automates the processing of credit events, which helps ensure orderly payouts to investors in these contracts. Last year, we handled 50 credit events.
In 2009, we won two RFPs [requests for proposals] that will further expand our role in the OTC derivatives market. The first project entails creating a new global repository to house OTC equity derivatives. This initiative will enable major players in the industry to meet a commitment made to regulators to have their OTC equity derivatives in a repository by July 31, 2010. The second project is the creation of a cash-flow matching service for OTC equity derivatives, which will reduce risk and settlement costs.
What are highlights from other areas of the business?
In Asset Services, we are forging ahead with the corporate actions reengineering, which will replace legacy systems with a single platform to handle these increasingly complex securities, both domestically and globally. Because of this initiative’s scope, we are deploying the new platform in phases, and we recently released an implementation timeline to customers so they can begin planning for it.
We are also well into the second phase of the underwriting reengineering, which focuses on corporate equities and debt. [Phase 1, completed in 2008, covered municipal underwriting.] The new underwriting platform began processing equity instruments in 2009, and now we are taking aim at corporate debt issues.
In the syndicated loan space, our Loan/SERV offering developed good traction in the U.S. and Europe last year. Now, we are developing cash settlement capabilities, including Delivery versus Payment, which will address a key counterparty risk by ensuring cash moves simultaneously with the transfer of ownership when loan trades settle.
In Wealth Management Services, an exciting development is the planned expansion of our Mutual Fund Services to Europe, which follows last year’s regulatory approval allowing us to admit non-U.S. members. We are also making strong progress with our Managed Accounts Service and this year plan to increase standardization and processing efficiency. In the alternative investment marketplace, we are working with the industry to introduce much-needed automation to an area of the business in which processing remains highly manual.
In Insurance & Retirement Services, we are rolling out a new service to automate and standardize replacement processing, which will include money settlement. The service will reduce costs and deliver greater efficiency to this process, which entails replacing an annuity or life insurance product from one carrier with a similar product from a different carrier.
Another focus in our insurance business is to expand usage of our core solutions by offering customers online, low-cost connectivity via the Access platform. This year, we plan to develop such a web-based interface for our Attachments service.
What are some of the new customer segments DTCC is targeting?
We remain focused on bringing more of the buyside under the DTCC umbrella, which will directly benefit these firms in terms of cost and risk reduction, while helping mitigate counterparty risk for the entire industry.
Another example of expansion into a new customer segment is our insurance business. We are looking beyond our traditional base of carriers and large broker/dealers to reach more independent broker/dealers, primarily through the Access platform.
In our Asset Services business, we’re reaching out to issuers to show how we can work with them on a broad range of corporate-related activities. While they are part of our customer base now, they may not be aware of the many other services we offer the issuer community.
How does DTCC work with customers to develop its strategies and plans?
We have a range of mechanisms for maintaining an ongoing dialogue with customers and the industry as a whole.
In addition to engagement with people in various functions and levels at our customer firms, we work with senior advisory boards and user groups that provide feedback on existing products and services. These groups also keep us informed about their business priorities and emerging needs, which enables us to formulate strategies for leveraging the DTCC infrastructure. This year, we have also launched a formal process to develop longer-term strategies for our products that will include input from our key clients.
Our customer survey is another vehicle for obtaining regular feedback from the firms that use our services. In addition, we hold customer forums throughout the year, including an annual meeting for senior executives from customer firms. These events are excellent venues to exchange ideas and information on emerging industry trends, which helps us establish the allocation of resources for future product development.
Finally, we play an active role in industry associations and events globally. @