For some businesses, being in the right place at the right time is a matter of good fortune. But for DTCC, leaving things to chance is not in our DNA. We have always believed that careful planning and preparation are the cornerstones of success, and nowhere is that more evident than in the steps we have taken since the 2008 financial crisis to ensure our capabilities remain perfectly aligned with evolving industry needs. As new regulatory mandates and other systemic changes create significant operational and cost challenges for financial firms, we have evolved and adapted to play a more prominent role supporting the industry.
We have steered ourselves to the right place at the right time, and today our “One DTCC” vision is allowing us to deliver on an expanded mission to protect the global financial system and create innovative solutions that allow us to support new markets, expanded asset classes and a wider range of clients. At the heart of our “One DTCC” vision is a single, unifying goal – to operate as a dynamic, global organization leveraging our collective assets to best serve clients across the post-trade lifecycle.
At the heart of our “One DTCC” vision is a single, unifying goal – to operate as a dynamic, global organization leveraging our collective assets to best serve clients across the post-trade lifecycle.
Risk management is our core responsibility, and we have empowered every employee at every level in every region of the world to act as a risk manager. True to our “One DTCC” vision, we are harnessing their collective insights to identify and mitigate risks across the enterprise, strengthening our capabilities to more effectively protect both ourselves and the industry.
This unique approach to risk management reflects a more fundamental shift that is taking place at DTCC. In 2015, we restructured our Group Chief Risk Office, expanding the purview of the department to include Technology Risk Management, Business Continuity Management, Physical Security Management, Vendor Risk Management and Enterprise Data Management. We also reoriented how we think about risk, moving beyond analyzing and managing it to building resilience into our processes, infrastructure and practices to detect, withstand and recover from potential systemic shocks. This evolution in risk management is being driven by several factors, including the growing interconnectedness of global markets, the regulatory response to the financial crisis and the seemingly increased frequency of extreme but plausible events – all of which have made the nature of risk more complex and highly unpredictable. In all that we do, our role as protectors of the financial markets remains foremost in our thinking, in our planning and in our actions.
By every metric, 2015 ranks as one of our strongest years in recent history. As an industry-owned and governed utility, we delivered on our goals in the most efficient manner possible while maintaining tight control over expenses. Our clients expect this of us, and we demand it of ourselves in every initiative we undertake. This mindset is ingrained in our culture, embedded in our planning, and it guides our prioritization and decision making.
In 2015, we had total revenue of nearly $1.6 billion compared to approximately $1.5 billion in the previous year. The 7% growth in revenues is primarily attributable to increased market volumes in our established clearing, settlement, asset services and matching businesses as well as increased traction in our repository services activities related to derivatives trade reporting for clients. We also closely managed our operating expenses, which complemented this growth in revenue and resulted in a 53% increase in operating income to $86 million in 2015 compared to 2014.
Since the designation of National Securities Clearing Corporation (NSCC), Fixed Income Clearing Corporation (FICC) and The Depository Trust Company (DTC) as Systemically Important Financial Market Utilities (SIFMUs) in 2012, we have aggressively worked to meet the heightened risk mandates and higher capital requirements now required of us. Likewise, for many of the services we provide, in 2015, we made excellent progress on various fronts to strengthen the franchise and position the organization for future growth.
First, we completed a two-part capital raise last year, sourcing a total of $800 million in additional equity. We initially raised $400 million in new common equity from our owner-members, principally to strengthen the financial position of our SIFMU entities, and this was closely followed by a $400 million preferred stock offering from the institutional capital markets. The additional capital will help DTCC to withstand extreme market conditions, reduce financial leverage, fortify the balance sheet and provide a solid base for investing in new initiatives to meet the evolving needs of our clients. Despite this being the first time ever that DTCC sought equity financing away from its existing shareholders, the response from investors was strong, as evidenced by the substantial over-subscription of the preferred offering. Further, our credit ratings continue to be the strongest among financial market infrastructure companies, reflecting our risk management framework, market standing, product mix and financial position.
Despite this being the first time ever that DTCC sought equity financing away from its existing shareholders, the response from investors was strong, as evidenced by the substantial over-subscription of the preferred offering.
Following the capital raise, we substantially lowered DTCC’s financial leverage, reducing our outstanding debt by over 60% during 2015. Long-term debt stood at $159 million at the end of the year, down from $404 million at the end of 2014. We further reduced debt in January 2016 by an additional $40 million, and this decrease, coupled with other scheduled debt maturities in 2016, will bring DTCC’s leverage down even further. This progress further supports our strong ratings and financial position.
Second, we made significant strides in advancing our recovery and resolution plans for our clearing agency subsidiaries – another mandate stemming from our designation as a SIFMU. In 2015, we completed major updates to our initial recovery plans and also developed stand-alone resolution plans as part of this multi-year initiative. Our effort is informed by work produced by the Financial Stability Board, CPMI-IOSCO and other systemically important financial institutions (SIFI) as well as input from our Board of Directors and other key stakeholders. In June, we issued a white paper, CCP Resiliency and Resources, detailing our strategy for maintaining critical services in times of distress, which provided increased transparency to our clients and the public regarding our approach to resolution and recovery. In addition, we continued to actively support the planning processes of our SIFI members by sharing information on how a distressed SIFI could continue to access critical DTCC services under a wide range of adverse circumstances.
Much like airlines have many strategic priorities such as reducing delays or improving baggage handling, their single most important responsibility is to ensure that the number of take-offs equal the number of landings. Likewise, for many of the services we provide, DTCC must clear and settle all the transactions in the financial pipeline every day with no margin for error. In 2015, the processing engines that underpin our core SIFMU businesses once again operated at the very highest levels of efficiency and accuracy, seamlessly transmitting massive volumes of data each day to exchanges, marketplaces, trading venues, clients, regulators and other stakeholders, often in real time. It is truly remarkable when you step back and consider that we processed $1.5 quadrillion in securities transactions last year – the 12th year in a row that our systems managed dollar volumes in excess of $1 quadrillion.
At the same time, we also continued to pursue critical initiatives for the industry to further reduce risks and costs in the U.S. clearing and settlement system, such as advancing the development of our Centrally Cleared Institutional Tri-Party Repo Service, completing the multi-year Settlement Matching project and launching the latest phase of our Corporate Actions (CA) transformation initiative. In our Wealth Management Services portfolio, we again saw robust growth amid increased volumes in Mutual Funds, Alternative Investment Products and Insurance & Retirement Services and drew positive feedback from our clients as we rolled out new services and enhancements. In all of these cases, as well as with many other initiatives currently underway, our overarching goal is to strengthen our core businesses and continue to provide the stability, certainty and reliability that is critical to ensuring the integrity of the global financial system.
In 2015, the processing engines that underpin our core SIFMU businesses once again operated at the very highest levels of efficiency and accuracy, seamlessly transmitting massive volumes of data each day to exchanges, marketplaces, trading venues, clients, regulators and other stakeholders, often in real time.
While our clearing agency subsidiaries are mature businesses, we also operate several start-up companies within DTCC Solutions that align with our “One DTCC” vision. We are making good progress growing these franchises despite the tough economic and regulatory environments, and are optimistic about their ongoing development in 2016.
GTR is now firmly established as the world’s only truly global swaps data repository, with unprecedented depth of coverage in all major jurisdictions. After a challenging 2014, the business is now generating positive cash flow, the stability of the platform is significantly improved and processing capacity is at record levels of more than one billion messages per month. We are providing an unprecedented degree of insight into the derivatives markets, publishing real-time data for the investing public on our website and producing more granular data for regulators to enhance their ability to monitor and mitigate systemic risk. In addition, we are leveraging our deep experience to share insights with supervisory agencies, such as issuing recommendations last year to CPMI-IOSCO on a path forward for harmonizing data globally.
Clarient™ is also a good example of our “One DTCC” vision. It will become the central hub that integrates our data assets, including Avox®, Omgeo ALERT®, GMEI and CRDE. This will create a single, end-to-end solution to support our clients' data management needs, from onboarding to ready-to-trade through ready-to-settle. The business continued to gain momentum in the marketplace last year and, while building community takes time, we are pleased to have signed more than 90 clients to adopt the service in 2015. In addition, we leveraged our Avox® solution to grow the database of validated legal entities by over 2 million and also launched the Clarient™ Public KYC, integrating assets we acquired this year from CounterpartyLink (CPL) with our own, to enable firms to refresh their know-your-customer data in a more efficient and cost-effective way.
We continue to draw enormous value from our full acquisition of Omgeo in 2013, which gives us unprecedented reach and capabilities to support our clients’ middle and back offices in a more holistic way. Omgeo’s network of over 6,000 clients, of which more than half are with buy-side firms, brought an unprecedented network to DTCC. Looking forward, we are focused on continuing to transform Omgeo ALERT® into the industry’s utility for standing settlement instructions and strengthening our value proposition by further reducing fees and leveraging existing DTCC assets, including the enormous amount of data we hold, to eliminate highly manual middle office processes to further drive down costs and risks for the industry.
DTCC-Euroclear GlobalCollateral Ltd. also made progress in creating an end-to-end centralized collateral settlement utility. Based on our strategic engagement with the industry, we defined a solution set for both the buy-side and the sell-side globally and established partnerships to integrate the service with other providers worldwide. The building blocks we put in place last year, including signing several global clients to pilot the Margin Transit Utility (MTU) solution, established a solid foundation to launch the business in 2016 and position it to remain at the forefront of the rapidly changing derivatives landscape.
For Soltra®, our cybersecurity joint venture with the Financial Services Information Sharing and Analysis Center (FS-ISAC), we saw tremendous interest not only within the financial community but also from governments and other critical industries last year. More than 2,000 entities, both financial and non-financial, from across the globe downloaded Soltra® Edge™, our threat intelligence sharing platform, and we are confident adoption will continue to grow, especially as we deliver a full suite of new products and enhanced features in the coming years.
As DTCC broadens its role supporting the industry, we know that we must transform how we engage with our clients and how our clients, in turn, engage with us. Evolving into a more client-centric organization is very much about a mindset, an attitude and an approach, but it also requires us to give our employees the right tools and resources to best serve our clients. We are committed to infusing outstanding client engagement into everything we do, and over the past year, we laid the foundation for this by improving our infrastructure, processes and organization.
For example, we have evolved our brand to better articulate our “One DTCC” vision to the marketplace. As part of this initiative, we repositioned Avox® and Omgeo as product suites under the DTCC brand to reflect their alignment with our existing services and organized our offerings into 6 new categories to simplify and clarify the wide breadth of solutions we provide. While our products and services have always stood on their own merits in delivering value to our clients, we believe that integrating them under a single brand creates a more powerful value proposition for the industry.
In addition, we completed several other projects that clients should begin to see the benefits of in 2016, including the launch of new web interfaces, the phased rollout of an improved client onboarding process and an enhanced model that will empower client service agents to deliver end-to-end support through ultimate resolution.
We are committed to infusing outstanding client engagement into everything we do, and over the past year, we laid the foundation for this by improving our infrastructure, processes and organization.
DTCC has been driving change in the industry for more than 40 years, but today we are more transparent in sharing our ideas, more proactive in leading industry dialogues and more skilled at raising awareness of emerging issues. We believe that inspiring creativity and driving innovation are a large part of the “One DTCC” vision.
Nowhere is this more evident than in our continued partnership with our colleagues across the industry on shortening the U.S. settlement cycle for equities, corporate and municipal bonds and unit investment trust trades from T+3 to T+2 – one of the most significant changes to the settlement process in decades. We’ve already seen markets across Europe and in select countries in Asia accelerate their timelines. In the U.S., this multi-year effort culminated in 2015 with the release of a white paper by the Shortened Settlement Cycle Industry Steering Committee (ISC), which outlined the timelines and activities for moving to a two-day settlement cycle before the end of 2017. We are proud to be working in collaboration with the Securities Industry & Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), among others, to reduce operational and systemic risk for all market participants and align the U.S. settlement cycle with other markets across the globe.
DTCC’s thought leadership is also evident in the research we have been conducting on the topic of systemic risk. In 2015, we issued our third white paper on the subject, building upon our previous work on cybersecurity and the bi-annual Systemic Risk Barometer. Our latest white paper focused on interconnectedness risk, an area of growing importance to the financial industry and regulators due to its potential to amplify financial shocks and spark contagion across marketplaces globally. We are pleased that the guidelines we published on creating a framework for firms to map, prioritize and mitigate their most critical interconnections have generated industry attention and prompted a dialogue with regulators and policymakers on leveraging them for their own analysis of risk in the financial services sector.
Another accomplishment that speaks to our commitment to building partnerships and driving change is the action taken by the U.S. Congress and U.S. President late last year to pass and sign into law bipartisan legislation that removed the indemnification provisions from the U.S. Dodd-Frank Act, which were preventing trade repositories including DTCC’s GTR service from sharing over-the-counter (OTC) derivatives data with regulators across jurisdictions. DTCC was the first to call attention to the negative impact of this provision several years ago, and striking it from the law has been one of our top U.S. public policy priorities. At a time when Congress is gridlocked on so many issues, we take great pride in having helped forge a bipartisan solution that will make markets safer for investors worldwide.
2015 will long be remembered as the year that the financial industry discovered blockchain – an electronic ledger of transactions that quickly became the most hyped technological advancement in decades. While the rhetoric may have been overheated at times, the fact is that we are excited by this once-in-a-generation opportunity to reimagine the post-trade infrastructure to address long-standing operational challenges. Throughout much of 2015, we researched, explored and tested the platform while meeting with virtually all of the major technology players in this field. We then assembled an integrated team of subject matter experts from across the enterprise to define potential business applications and established an “Office of Blockchain Strategy and Research” to coordinate activities. We intend to be at the forefront of this issue by helping to spearhead industry experiments and use cases, serving as a leader in the governance of open source, fostering collaboration among market participants and by making strategic investments in partners that can help advance the technology.
We intend to be at the forefront of discussions on leveraging distributed ledger technology by spearheading industry experiments and use cases, serving as a leader in the governance of open source, fostering collaboration among market participants and by making strategic investments in partners that can help advance the technology.
At the heart of “One DTCC” are our employees, who bring this vision to life each day. Their pride of ownership in the work they do and seemingly endless capacity to give back to their communities inspire us in countless ways. We are honored to be surrounded by an outstanding team of colleagues, and their passion drives us to make DTCC the very best place to work and build a career.
A key component to creating a dynamic work environment is our strong commitment to diversity and inclusion. In a global environment, the importance of understanding and incorporating local customs and values when working with clients and employees is paramount. Building and maintaining an inclusive workplace, where employees of all backgrounds feel welcomed and valued, is critical to our long-term success. At DTCC, we are committed to leading on this issue and took a number of steps last year to create opportunities and career paths for women and historically underrepresented groups. Among the initiatives, we conducted a series of focus groups to better understand the challenges these employees face in the workplace and created an emerging talent program to support their growth. Our Diversity and Inclusion Council continues to bring senior management attention to key issues and ensures that our passion for the issue translates into actions.
A key component to creating a dynamic work environment is our strong commitment to diversity and inclusion. In a global environment, the importance of understanding and incorporating local customs and values when working with clients and employees is paramount.
As we continue to foster our “One DTCC” vision, we also integrated a diversity and inclusion lens into our corporate social responsibility work by supporting education and training in the disciplines of science, technology, engineering and mathematics (STEM). For example, we funded research and engaged with non-profit, non-partisan coalitions like Change the Equation, a CEO-led effort to mobilize the business community to dramatically improve the quality of STEM education in the United States. At the same time, our employees volunteered their time to support dozens of organizations and a wide range of causes, from the Virlanie Foundation in Manila to Caia Park in Wrexham, Hand In Hand India in Chennai and Pencil in New York. We thank all our employees for giving back and representing DTCC in our local communities.
We are thankful for the continued confidence that our clients place in us and appreciate the ongoing dialogue we have with our regulators. We also strongly value the support and collaboration with our Board and are especially grateful to Bob Druskin for his leadership over the past 5 years as Executive Chairman. Bob transitioned into the role of Non-Executive Chairman on January 1, 2016, moving away from his day-to-day responsibilities to focus on the longer range strategic direction of the firm. During his time with DTCC, Bob has made a profound impact on the company. His keen insights on the markets, his passion for client service and his constant reminder to “Do the Right Thing” elevated and prepared us to play a larger and more impactful role in the industry. On a personal note, our daily partnership was a highlight of my job, and I look forward to continuing to work closely with Bob in his new role.
As we look to 2016, it is clear that we are well positioned for the future, but our success is not guaranteed or inevitable. The competition is growing and, with the industry looking to post-trade infrastructures for greater support, we will need to compete for and win business as new players enter the market. We have steered ourselves to the right place at the right time, and we are determined to make the most of this opportunity. As “One DTCC,” we are excited to move forward in our journey and ready to deliver even greater value by leveraging our global assets on behalf of our clients and the global industry.
Michael BodsonPresident and CEO