Susan Cosgrove, DTCC Chief Financial Officer.
As part of DTCC’s ongoing commitment to deliver client value, the firm launched a comprehensive review of fee structures across all its products and services last year. The initial wave of changes simplified the fee structure for the firm’s three registered clearing agency subsidiaries (National Securities Clearing Corporation (NSCC), The Depository Trust Company (DTC), and Fixed Income Clearing Corporation (FICC), collectively, “Clearing Agencies”), with the goal of greater transparency of pricing for their respective participants and members, along with $25 million in fee reductions. Fast forward to Spring 2019, DTCC recently simplified and aligned the fee structure for most Institutional Trade Processing (ITP) services and is now focused on additional changes that will impact other ITP solutions services as well as offerings by its Repository & Derivatives Services (RDS) business.
In this interview with DTCC Connection, Susan Cosgrove, DTCC CFO, provides an update on the fee restructuring initiative and a look ahead to what clients can expect for the remainder of 2019 and 2020.
Over the past several years, DTCC has taken a number of important steps to enhance the firm’s financial strength and stability, which ultimately created the opportunity to review our pricing strategy. What were the key drivers that underpinned this initiative?
SC:First and foremost, our goal was to capture the value that we deliver to firms, via our subsidiary’s services, through our fee structure while providing a simple and transparent pricing structure. This was an important area of opportunity because our clients often cited this as a pain point during our regular outreach and engagement with them. Second, we wanted to further strengthen our own financial stability and continue to align pricing with our cost structure for providing services. As systemically important financial market utilities (SIFMUs) in the U.S., the Clearing Agencies are required to be financially sound to protect the safety and security of the system and their participants. And third, we saw an opportunity to review, refresh and continuously monitor our pricing structures to ensure we are incenting industry-wide best market practices by leveraging pricing to drive behavior that supports risk mitigation, efficiency and low cost. For this last point, we have established an internal Pricing Advisory Group to oversee pricing recommendations and to help support adherence with strategy and established regulatory requirements and internal guidelines.
What have been the initial results of fee revisions associated with this effort?
SC: We’ve gotten very positive feedback from participants based on a series of changes we made last year. For instance, we restructured the pricing of FICC’s Government Securities Division (GSD), which removed the perceived barrier to entry for participants that execute high volumes of trading activity but have no end-of-day positions and, thus, present no overnight risk to FICC. Through this change, and in conjunction with the Sponsored Membership program, we’ve been able to bring more market participants into FICC, which helps enhance market efficiency and strengthen financial stability.
We built on that effort by simplifying the fee structure for DTC, FICC’s Mortgage-Backed Securities Division (MBSD) and NSCC, to streamline invoicing and make it easier for clients to allocate the Clearing Agencies’ costs to their businesses. Specifically, we reduced the number of individual fee codes, or triggers, by more than 50%, from 644 down to 310.
That’s a significant amount. Why was this change so important to achieving the objectives you mentioned earlier?
SC: Reducing the fee codes was essential to simplifying the Clearing Agencies’ fee structures. Historically, the structures were focused on charging for how transactions travel step-by-step through the clearing systems versus charging more broadly for service categories through the participant lens. With that as the focus, we reduced and eliminated fees with low usage and consolidated fees charged for similar services at the same rate. This allowed us to simplify the Clearing Agencies’ fee structures while also better aligning them to participant value. In addition, for NSCC, we modified the Trade Capture fee structure from the flat per-ticket charge to a structure based on the gross notional value, which better aligns with the cost to manage the risk that is presented to NSCC. We also made an overall reduction to settlement fees at DTC to help incentivize the industry to take advantage of the benefits of Settlement Optimization.
What can clients who use services offered through the ITP business expect in 2019 and 2020?
SC: There are several moving parts to our plan, which are all consistent with the drivers I mentioned earlier. We have been focused on updating ITP pricing to align with the business strategy of consolidating platforms, which will result in several fee changes that are being implemented with July 2019 invoicing. First, we will support the migration of OASYS clients on to the CTM platform by removing pricing as a barrier. Through our new standard rate card, we’ve aligned the CTM and OASYS rate cards by reducing CTM pricing by approximately $10 million. We will also begin charging clients for OASYS TradeMatch (OTM) volumes on the same standard rate card, which was historically a service that certain client segments did not pay for. Second, in parallel to this, we’ve also introduced price changes that will impact users of our ALERT platform, including investment managers (effective May 1, 2019) and brokers (effective July 1, 2019), to support the investments and enhancements we’ve made to this service in recent years and to reflect updated service usage measures.
In the aggregate, the consolidated impact of the ITP price changes will be revenue neutral to DTCC, but some firms will see variations in their bills. Our relationship managers have been reaching out to clients to speak to them directly about their specific impacts. In addition to the changes implemented to date, we’re also focused on providing a solution for the TradeSuite fixed-fee contracts, which are set to expire on December 31, 2019. We will be ready to announce that proposal by the end of Q3 2019.
You’ll also be implementing fee reductions for clients of RDS in 2019. What are your plans and when will these changes go into effect?
SC: The first wave of reductions for RDS services are being implemented with July 2019 billing, which will include a fee reduction of approximately $10 million annually for a portion of trades reported to the U.S. Commodity Futures Trading Commission (CFTC). This reduction is in relation to fees applicable to the (non-clearer) counterparty of a cleared trade. We plan to continue adjusting these fees for cleared trades by an additional $10 million next July, which, combined with reductions we made to these fees in 2016, will total an aggregate annual savings to applicable clients of $30 million.
As the operator of the Global Trade Repository service (GTR), which supports derivatives reporting through locally registered or recognized trade repositories, we believe that our new pricing model will further strengthen the value we’re delivering to clients by helping them meet their regulatory obligations in the most efficient and cost-effective manner possible. In addition to these changes, we’re focused on continuing to offer clients of applicable trade repositories a Long-Term Commitment (LTC) option, which provides a discount in exchange for a commitment to utilize the service. We are also focused on developing fee structures for service offerings that will be launched in 2020, such as our new solution for Securities Financing Transaction Reporting (SFTR) and our new Report Hub services, which will allow firms to enrich, normalize and validate their data before submitting it to the applicable DTCC trade repository. We’ll share more information with the industry as we finalize our plans.