Michael Bodson, DTCC President and CEO
A new chapter in the 40-year history of The Depository Trust & Clearing Corporation (DTCC) began in July 2012 when Michael C. Bodson was appointed President and CEO. Bodson took the helm of the organization as the industry began to emerge from one of the worst financial crises ever. The near meltdown of the global financial system reshaped the landscape of the marketplace and created new opportunities for clearinghouses, central securities depositories and other infrastructures to innovate and help firms operate in a more highly-regulated and complex environment.
DTCC Connection recently sat down with Bodson to discuss his three years leading DTCC, the opportunities and challenges facing the company and the organization’s strategy for extending its reach to support financial firms more holistically during this period of transformation.
DC: Within weeks of becoming CEO, you had to manage through two major crises – Superstorm Sandy and the Knight Capital technology incident. How did those events shape your leadership?
MB: Those events showed me how crucial it is for all employees to understand the importance of their roles and how to respond in a crisis. For example, during Sandy, we had to quickly organize cross-functional teams to coordinate and manage a multi-faceted response to the flooding of our securities vault at 55 Water Street. These teams had to develop and execute a strategy for protecting the site without electricity while also planning ahead for the recovery and restoration of 1.7 million securities that were damaged in the flood – an unprecedented job under the most difficult of circumstances.
In addition, our technology team had to flawlessly execute shutting down our New York data center in the middle of the night after lower Manhattan lost power and the flooding caused the fuel tanks for our generators to burst. And it’s important to keep in mind that these and other critical activities had to be coordinated with many of our key people working remotely because the storm had rendered our headquarters inaccessible.
The Knight Capital incident sent a shudder through the industry and had the potential to create chaos in the equity markets and negatively impact our clients. Across four days, we worked closely with Knight Capital, our Board Risk Committee and our regulators to protect DTCC and our clients from any potential losses while also mitigating systemic risk. In addition, we worked hand in hand with Knight Capital to manage settlement of the erroneous trades. The result of these efforts was a speedy resolution that averted a full-blown crisis and helped keep Knight Capital solvent in the days immediately following the crisis.
I can share with you similar stories over the past three years, but the common thread connecting each instance is that our single most important responsibility every day is to protect the stability and integrity of global markets and our clients.
The key lessons I learned are that every employee in the firm must understand that what he or she does is critical and that we must empower them with the tools and authority to do their jobs to the best of their abilities. While Sandy and Knight may be extreme examples, I can tell you that this approach has served us well over the last three years.
DC: Two years ago, the company outlined a refreshed strategy that calls for DTCC to play a larger role in helping the financial industry address some of its top operational challenges related to reducing risks and costs and increasing transparency. Can you explain the core tenets of the strategy?
MB: The financial crisis represented an inflection point, and it was clear almost immediately that the re-regulation of financial markets would reshape how the industry operates. In this new environment, firms would face an intensified regulatory landscape, which would create new cost and compliance challenges. In addition, we began to see ROEs drop down to single digits in some cases from highs in the mid-20s just a few years ago. As a result, firms have had to cut costs and shutter certain business lines, but that alone has not been enough to return to higher levels of profitability.
It was the confluence of these and other dynamics that prompted us to rethink everything about our business – how we operate, our structure and how we could play a larger role helping the industry meet these challenges while reducing risks and costs.
In 2014, we conducted a study of the post-trade ecosystem for sell-side firms, custodians and utilities, in the U.S. and Europe, and the results were eye-opening–approximately $100 billion is spent annually on back office costs but only 5% of that reflects spend by the industry utilities. This was an “aha” moment. If the industry could more effectively leverage its utilities, such as DTCC, Euroclear, the Options Clearing Corporation (OCC) and others, and if the utilities could collaborate to a greater degree than they have in the past, we saw huge opportunities to centralize and standardize certain non-differentiating process to drive down costs and risks through economies of scale. As we explored this further, we started to identify functions that are redundant across banks and that don’t provide them a competitive advantage – processes that are ideal for centralization within a utility. In fact, some of these processes actually could increase operational and reputational risk when managed individually by firms.
DC: How has DTCC collaborated with industry partners to provide these types of innovative solutions for clients?
MB: Addressing the operational and compliance challenges related to client data is a perfect example. The industry was looking for a solution to reduce complexity and address evolving risk and regulatory requirements, including Know Your Customer (KYC), Foreign Account Tax Compliance Act (FATCA), European Market Infrastructure Regulation (EMIR) and Dodd-Frank. In response, DTCC partnered with six founder banks to form Clarient Global LLC. The banks bring a strong understanding of their needs in the client reference data space, and we leveraged that expertise in the design and development of the utility.
The same holds true of our joint venture with Euroclear related to collateral processing. DTCC-Euroclear Global Collateral Ltd. will help firms manage the capital and operational challenges that is expected from the increased volume and velocity of margin movements worldwide due to new regulatory requirements.
Going forward, we will continue to look for opportunities to leverage our unique strengths, capabilities and expertise to drive the development of innovative products and services that address key industry challenges.
DC: DTCC assumed full ownership of Omgeo two years ago with the goal of driving a single, global strategy for post-trade processing and settlement. What role has the Omgeo acquisition played in supporting DTCC’s ongoing efforts to serve clients, reduce risk and increase efficiency in post-trade processing?
MB: The Omgeo acquisition allowed us to address several key issues that we identified as essential to expand our support for the industry. First, we gained an outstanding team of entrepreneurial, tech-savvy people who have great knowledge of the industry and a passion for client service. They brought strong relationships with the buy-side and a global sales and a relationship management team that has allowed us to engage with our clients in a much deeper and more meaningful way. In addition, Omgeo’s global footprint helped expand our reach into multiple new markets and has played a key role in growing our ability to sell our global solutions, such as Avox, Clarient and the Global Trade Repository.
Second, the acquisition has been instrumental to our strategy of driving greater collaboration among investment managers, broker-dealers and custodian banks to advance key industry initiatives designed to reduce risk and costs in post-trade processing. These include shortening the U.S. settlement cycle, the move to same-day trade confirmation of institutional trades and the roll out of “Settlement Matching.”
Third, we are integrating the Omgeo product suite into DTCC’s to provide an integrated set of solutions across the post-trade life cycle to support our clients in a more holistic way.
DC: Strengthening client engagement has been a top priority for you as CEO. How has DTCC evolved into a more client-centric organization in recent years, and can you share examples of how we are more effectively serving clients today?
MB: We strive every day to provide our clients with a world-class experience. Admittedly, we have had some past issues, but I think clients are starting to see a new DTCC that is easier to work with, more engaged in their businesses and more responsive in getting issues resolved.
This is due, in large part, to three strategic initiatives we have undertaken over the past year. One, we are focusing on creating a culture of client-centricity. Notice I stress the word “client.” Previously at DTCC they were called “participants” or “members” since they were viewed as part of an industry utility. We told all employees to start calling them clients because that is what they are. It was a small step, but culturally it was important to reorient how we think about those who we serve.
Two, we reviewed our organizational structure and, after completing the Omgeo transaction, we combined the sales and relationship management teams and appointed our first-ever Chief Client Officer, Tim Keady, who sits on the DTCC Management Committee. This helps ensure that the perspective of the client is included in all discussions among the senior leadership of the firm.
Three, we are focused on providing a single, seamless and simpler interface for clients to access our integrated product offerings. This will take time to develop and roll out given the wide breadth of products and services we offer, but we continue to make progress every day in achieving this important goal.
DC: With the designation of DTCC’s three clearing agency subsidiaries as systematically important financial markets utilities (SIFMUs) three years ago, how has DTCC enhanced its risk management practices?
MB: Risk management has always been our most fundamental responsibility and is at the forefront of what we think about every hour of every day. We are here to protect the financial markets and our clients. We know if we don’t get that right, if we take our eye off the ball, we won’t be able to pursue new initiatives or products that can benefit our clients or the industry.
While having our clearing agencies designated as SIFMUs raised the level of regulatory oversight and has prompted us to advance several new initiatives to strengthen our risk management capabilities, fundamentally I don’t think it changed our approach and awareness of the importance of managing risk. That is a core tenet of our culture.
DC: What are the current and emerging risk challenges the global financial marketplace faces and how is DTCC prepared to help the industry address them?
MB: As for new and emerging risks, cyber-security is the greatest threat facing the industry today. We spend a significant amount of time and financial resources on improving our cyber defense capabilities, but the environment is growing more dangerous and complex by the day and we need to keep raising the bar to protect ourselves. One of the ways we are doing that is with our new product, Soltra EdgeTM, which is the first offering from our joint venture with the Financial Services Information Sharing and Analysis Center (FS‐ISAC) that we launched in 2014. Soltra Edge provides a means of exchanging cyber-threat information in a standardized structure through standardized messaging so that information can be ingested and acted upon quickly by users. It facilitates a community-driven approach to cyber security in which one user can share intelligence so that we are all working in concert to protect against an attack.
Another top issue is the increased attention among lawmakers and regulators to the role of CCPs, the amount of skin in the game they have, their liquidity resources, recovery and resolution (R&R) plans and stress testing. We are delighted that there is increased understanding of the benefits and the risks of centrally clearing products, and we are engaged in the dialogue to share our unique perspective with policymakers and market participants.
A key point we are stressing is that each CCP must be understood individually as risk profiles, ownership structures and available resources, along with the products they clear and the risks they pose, are different. A blanket approach that tries to compare multiple, highly disparate CCPs may be misleading.
DC: What are the disruptive technologies that you think may have the biggest impact on financial markets and, in particular, market infrastructures?
MB: There has been a lot of discussion about how new technologies such as blockchain and distributed ledgers will make the existing market infrastructures obsolete. Unfortunately, much of the discussion seems to be a case of the tail wagging the dog. The technology is intriguing and we are actively evaluating potential applications related to post-trade processing, but we cannot lose sight of the fact that market infrastructures have developed in order to not only lower costs but also to protect the stability and integrity of the marketplace and the system as a whole.
If you look at the U.S. markets, they are the deepest and most liquid markets in the world. Why? It’s because they are highly and effectively regulated. While some people may complain about the level of regulation at times, we must remain mindful that regulation is essential and provides the protection, certainty and transparency that gives investors confidence in the market. So, the question is, how do you apply these new technologies in a way that further drives down risks and costs while still meeting the high standards established through decades of market regulation and market practices? That is part of the challenge that many institutions, including us, are working through right now.