by Helen Cunningham
When Donald F. Donahue reflects on his six-year tenure as CEO of DTCC, the theme that comes to his mind is “there be dragons.” It is a reference to risk, borrowed from medieval mapmakers who labeled dangerous or uncharted areas of the world with a warning: there be dragons.
Donahue, who retires in July, smiles when he notes that dragons are not a motif he would necessarily have chosen for his time at the helm of DTCC, but risk – and its ever-shifting parameters – is the reality he was dealt.
“Events of the past decade dramatically highlighted the very serious risks we face – creating a whole new set of issues we’ve had to deal with,” he said. And as head of DTCC, Donahue had to think past the immediate and emerging risk issues facing the company. He also had to contemplate the dragons – the unknown threats lurking beyond the horizon. “Given our responsibility for the integrity of the industry’s infrastructure, we’ve always got to think preemptively,” he said. “We have to figure out where the next vulnerability is coming from, and safeguard against it.”
For all DTCC’s success in identifying and managing risk, the dragons still kept Donahue up at night. “Not having a crystal ball to see the next thing that could endanger us – the knowledge that something out there could put a hole below the water line – is always a source of anxiety,” he said.
A 26-year perspective
Donahue has seen DTCC go through three generations since he joined the company in 1986.
“When I started on Wall Street, certificates were flying around in black boxes all over lower Manhattan,” he recalled. DTCC’s predecessor companies changed all that, bringing about an “industrial revolution” that transformed the U.S. markets. “DTCC 1.0 began automating the processing of securities transactions and financial assets in the 1970s, giving the industry an infrastructure for handling the surging volume of financial activity in the following decades,” he said.
Next came DTCC 2.0, the transformation of the organization from within, initiated with the 1999 creation of DTCC as a holding company for The Depository Trust Company and National Securities Clearing Corporation. “We were reinventing the organization to meet the new challenges facing the industry,” Donahue said. Big issues on the agenda included Y2K, globalization, technology, innovation, the exponential growth of trading volumes and the urgency of reinforcing the financial sector’s infrastructure following 9/11.
This era was also marked by consolidation, as DTCC brought the industry’s fixed income clearing organizations for government and mortgage backed securities under its umbrella, and then moved to consolidate the risk management infrastructures of its subsidiaries. Risk, always a priority for DTCC subsidiaries, assumed growing importance as the 2000s progressed.
In 2003, DTCC began work on what would become the Trade Information Warehouse, the first global repository for over-the-counter (OTC) derivatives. “The Warehouse was an incredibly successful solution to a problem neither DTCC nor the industry completely understood at the time we were building it,” he said. “And we did not fully appreciate how impactful it would be until several years later.”
Eye of the storm
The most challenging phase of Donahue’s tenure as CEO began in 2007, when the global financial crisis reared its head. By 2008, the collapse of Lehman Brothers sent shock waves around the world, ushering in a prolonged period of financial stress that took the industry into uncharted territory.
DTCC’s ability to work with customers, the markets, regulators and lawmakers through the turmoil of those early days and the uncertainty that followed is a source of enormous pride for Donahue. “We demonstrated – in a very unruffled way – our ability to bring certainty and risk management to a critical area of the financial system, which helped keep the markets functioning seamlessly,” he said, adding that to this day, customers and colleagues comment on DTCC’s steadfastness under fire.
DTCC carried out its work with resourcefulness, identifying looming threats and tackling them to help dampen the flames of the crisis. In particular, the company earned recognition for its successful handling of the Lehman Brothers’ bankruptcy, which entailed winding down more than $500 billion in trades at a time of unprecedented turmoil in global capital markets. DTCC managed the fallout without drawing on members’ clearing funds or tapping its credit lines – and without creating additional disruption for the markets.
During this period of upheaval, the Trade Information Warehouse also contributed to calming the markets and helping to keep them stable. Donahue points out that, had the Warehouse not been operational, the consequences could have been dire when Lehman failed and again when General Motors went into bankruptcy in 2009.
“Many people don’t realize that the operational risks associated with OTC credit default swaps earlier in the decade were a huge accident waiting to happen. Because DTCC had worked closely with the industry to build the Warehouse, effectively dealing with the issue before it became a problem, that accident didn’t happen,” he said. “The former operational problems with credit derivatives were the dog that didn’t bark in the night.”
Risk and regulation
The 2008 financial meltdown pushed risk to the forefront of the industry’s agenda, setting the stage for DTCC 3.0 – working with the industry, regulators and policymakers to transform DTCC’s role in the financial sector’s risk ecosystem. Donahue spearheaded this mandate, leading a sweeping transformation of the company’s approach to risk manage-ment, giving it a new structure, a new discipline and more dedicated resources.
Donahue also focused on reinvigorating the corporate culture. As he told employees in 2010, “DTCC 3.0 represents the challenge of instilling our organization with a much more far-reaching understanding of our role in the broader industry and our critical role in mitigating risk in the global clearance and settlement system.” He underscored the need to be creative and collaborative in assessing systemic risk. “We cannot address these systemic issues on our own, but will do so in partnership with regulators and a broad array of market participants, with oversight by our Board of Directors.”
A critical aspect of the DTCC 3.0 transformation entailed strengthening and redefining the company’s relationships with regulators, ensuring closer collaboration and communication.
In addition, as governments around the world began writing financial reform legislation post-2008, DTCC assumed a new leadership role in addressing these issues, working with regulators and policymakers on both sides of the Atlantic to shape and implement the new laws governing financial markets.
Crossing borders, building the team
DTCC’s global expansion gained momentum on Donahue’s watch, as well.
EuroCCP, which went live in 2008, has played a major role in driving down clearing costs in Europe. And the infrastructure DTCC has built to reduce risk in the OTC derivatives markets, already established in the U.S. and Europe, is being extended to create a presence in the Asia-Pacific region. The company has opened data centers in Europe and Asia, expanded its technology center in India and grown its Shanghai office to provide greater capabilities for global corporate actions processing and core Operations functions.
Another source of pride for Donahue is how DTCC successfully regenerated and broadened its leadership team, and deepened its bench strength.
The company has also gained the confidence to let the right people lead at the right time. “We have learned to let different people step up when their moment arrives,” Donahue said. “It’s very powerful to watch: you see people who don’t realize they’re walking across the high wire until they reach the other side and, all of a sudden, they’re there – and they’ve made a real contribution.”
Constants across the years
One thing Donahue said has not changed over three decades is the strong commitment DTCC and its people have for the integrity and safety of the industry’s infrastructure. “Obviously, this sense of dedication expresses itself in different ways now than in the past, but it remains very much alive inside the organization today,” he said.
The quality and collegiality of DTCC’s people are other aspects of the culture that have endured and made the job gratifying. “I’ve really enjoyed deal-ing with the staff and all the unbelievably creative people we have here,” Donahue said.
Becoming a blogger
Donahue has explored new ways of interacting with employees as the company’s culture has evolved to meet the new challenges. In 2011, he launched a thrice-weekly blog to communicate directly with employees and create an open forum for discussing issues such as risk, leadership and diversity at DTCC. “It’s been interesting to see the nature of the conversation change,” he said. “It’s like watching water trickling through a streambed, finding its own way with different branches flowing together into a stronger current.”
In one of his blog postings, Donahue spelled out his philosophy about the defining theme of his tenure as President and CEO.
“I believe DTCC and other market infrastructures need to seek out and deeply understand the places where ‘there be dragons.’ We need to pay close attention to what happens in the extreme places…. to push our thinking out to those extreme places, to try to under-stand the pressures that we would come under in extreme market conditions and how we would respond to them.”
Fitting words from a dragonslayer. @