by Helen Cunningham
The April meeting of DTCC’s Board of Directors laid the groundwork for the organization’s strategy for the coming years. Michael Bodson, DTCC executive managing director, Strategy and Business Management, spoke to @dtcc about some of the key themes that emerged from that meeting.
What is DTCC’s three-to-five-year business strategy?
Our strategy is to grow the core business and expand into "logical adjacencies," meaning related or adjacent areas in which we can leverage our core capabilities. After much research, analysis and discussion, that was the basic proposal we made to the Board, and the Board endorsed it.
– Michael Bodson, DTCC executive managing director, Strategy and Business Management
This approach defines DTCC by its core capabilities – our ability to manage risk, reduce costs, create standards and efficiencies, process high volumes and provide a secure, reliable network – rather than in terms of specific services or asset classes. We will work with customers to assess the industry’s needs against our core capabilities and determine where we can move into new spaces to add value.
Could you talk more about growth through adjacencies?
This concept reinforces the fact that the core is key. We need to remain focused on the core and to grow selectively, in areas that align with the core. So let’s say we’re offering a service for one asset class, can we extend it to another asset class? Or if we’re providing a capability to the buyside, can we offer it to the sellside?
This gives us a logical approach for expanding the business without losing sight of the fundamentals that DTCC delivers to the industry every day. So rather than pursue an opportunity that is completely far afield from our core business, we will target new areas that are adjacent and will benefit from our existing capabilities.
Our strategy is to grow the core business and expand into "logical adjacencies," meaning related or adjacent areas in which we can leverage our core capabilities.
Our OTC [over-the-counter] derivatives trade repository offers an example of how to leverage adjacencies. We started with credit derivatives, then we won a mandate to build the OTC equity trade repository and now we’re preparing to bid on a third repository. So rather than define that capability as a credit derivatives warehouse, we have an OTC derivatives repository and we are exploring opportunities to extend it to new asset classes.
What about expansion through partnerships?
Partnerships will remain another key component of our strategy to serve the industry. If we can add one plus one, and get three, we will do it.
As in the past, we will take a flexible approach and explore everything from joint ventures, such as New York Portfolio Clearing [NYPC], our planned venture with NYSE Euronext, through to contractual agreements, such as the Accord we have with the Options Clearing Corporation [OCC].
Both these arrangements represent innovative thinking that delivers value to the industry. NYPC will create capital and operational efficiencies by making it possible for fixed income customers to margin risk on a portfolio basis across both cash and derivatives markets. The OCC Accord has brought greater efficiency to customers’ margining for options’ exercises and assignments, without diminishing risk management.
What else was on the agenda at the April Board meeting?
Another recommendation we made, which the Board endorsed, empowers us to explore smaller-scale solutions rather than building for scale right out of the box. In the past, we often tried to solve problems for the entire industry, which required gaining consensus and building solutions to accommodate everyone’s needs. That was slow because of the complexity and expensive because of the need to build to a large scale.
Going forward, we will be open to working with smaller groups of firms to propose and implement solutions that have the flexibility to scale up as additional firms sign on. So rather than build large solutions and hope the volume comes in, we will add scale as demand increases. This approach will enable us to be quicker to market and more economical in developing services.
The Board also validated DTCC’s role as a thought leader and gave us a mandate to take an even more visible public stance in identifying industry issues, proposing solutions and driving them forward.
How will DTCC raise its thought leadership profile and why now?
We will be participating in more public forums to share our views and make recommendations on key industry issues.
We have also become more engaged on the regulatory and legislative fronts, both in the U.S. and Europe. We are contributing to policy debates regarding financial reform and informing key constituents on both sides of the Atlantic about DTCC’s role in global capital markets. And DTCC is in a strong position, because we are not driven by the profit motive; rather we are trying to do what is right for the market structure.
One concern we have with re-regulation is the threat of unintended consequences, so we are educating policymakers on the potential impact of certain proposals. For example, we have spent a lot of time talking about OTC derivatives and the importance of one global repository per asset class to store information and make it available to regulators and the public on a timely basis. If the industry ends up with multiple repositories, it could impede regulators’ ability to assess systemic risk, which is essential for protecting investors and the integrity of the financial system as a whole.
On another thought leadership front, we will broaden our dialogue with customers beyond our traditional constituents in operations and technology to other parts of firms, especially the front office and market structure groups. We also are reaching out to the buyside to extend DTCC’s capabilities to that segment of the industry and to understand how we can better service it.
Could you talk about how DTCC benefits from outreach to existing and prospective customers?
Outreach plays an essential role in our strategic planning process. It gives us a comprehensive view of our customers’ business and helps us identify areas in which we can further support individual firms. It also helps us identify common issues across firms for which we may be able to propose and execute solutions. As one Board member said at the April meeting, DTCC is qualified to solve the problems of many firms better than any one firm can do by itself.
On the other side of the coin, outreach helps firms understand DTCC’s full range of capabilities. Research we conducted last year indicated that, within customer firms, key groups often fail to understand what DTCC does. At the same time, a growing number of people who know DTCC say it is important for their executive teams and front offices to understand the role we play in the market structure.
These trends reflect the fact that the game has changed in the last few years. The financial crisis heightened the focus on risk management, and put renewed emphasis on cost and capital efficiencies. As a result, most senior executives in the industry now recognize the impact of clearing, netting and settlement on their overall business, whereas that was not necessarily the case five years ago.
Does DTCC have plans to leverage the huge quantities of data it stores for the industry?
We are already publishing data on OTC credit derivatives from our Trade Information Warehouse, which has increased transparency in this market.
And we see considerable potential to use data for other areas of the industry. For example, in the new regulatory environment, there will be more focus on reporting and monitoring of markets. So rather than have customers and regulators reinvent the wheel in terms of reference data or other types of information, we are assessing our capabilities for providing it. If we can supply data quickly and cost-effectively, both the industry and regulators benefit.
What are the drivers of DTCC’s international strategy?
Again, it starts with the core and is consistent with our domestic strategy. We will look for international opportunities that enable us to bring value to the global marketplace and to our customers. We need to look at markets where our ability to process at a level that meets our scale levels exists.
An example of this strategy is EuroCCP. We identified the need for pan-European clearing and brought our competitive advantages of risk management and processing capabilities to drive down clearing costs and boost efficiencies. That is how we will approach geographic expansion, working from the core. @