While the COVID-19 pandemic continues to roil financial markets globally, DTCC has already begun assessing and implementing lessons learned related to market volatility, risk management and technology, as well as determining a path forward as client and industry needs evolve rapidly as economies globally begin to reopen.
DTCC senior executives discussed these and other related topics during the firm’s recent live-streamed event, “Business as Unusual - Defining the New Normal.”
“Since the pandemic started, we’ve seen record volumes in the financial markets, excessive volatility, and we’ve had to deal with this with our staff working remotely,” said Mike Bodson, DTCC President & CEO, in his opening remarks. Despite these extraordinary events, DTCC and the industry showed extreme resilience and agility in seamlessly processing transactions and providing market stability and certainty.
Lessons Learned: Volume and Volatility
As events unfolded, DTCC quickly executed its continuity and resilience plans for a pandemic scenario, said Andrew Gray, DTCC Chief Group Risk Officer. DTCC increased monitoring and due diligence of specific clients, sectors and activity, and “effectively managed our market, credit and liquidity risk,” he said. Amid the market turmoil, the Risk group coordinated corresponding increases in margin and multiple large intraday margin calls, accommodated clients by extending the deadline to fund intraday calls for NSCC and GSD, established a formal intraday call for MBSD, and extended settlement on certain occasions.
“Our risk systems performed well and the investments that we have made in our financial risk infrastructure put us in a very good position to monitor and manage risk, responding quickly to the swings we saw in the market,” Gray said.
Capacity planning and stress testing are critical elements of DTCC’s continuity strategy. Capacity planning analyzes historical volumes and seasonal volume days, then factors into account future client and market considerations. Adjustments in volume testing and appropriate investments are made based on these data points.
That capacity testing preparation helped DTCC flawlessly handle 363 million equity transactions on March 12 – a record for the firm. According to Lynn Bishop, DTCC Chief Information Officer, “we’ll continue to test and adjust the volume numbers and thresholds for stress testing based on these new peaks.”
Significant intraday margin calls were a challenge due to peak volume and volatility. Murray Pozmanter, DTCC Head of Clearing Agency Services and Global Operations, explained that a factor was the difference between cleared and uncleared trades as firms were caught between margin calls. New record levels of U.S. Treasury debt issuance will add to the volume and put a tremendous strain on markets and balance sheets. Pozmanter noted, from a balance sheet standpoint, “this is something firms will need to monitor much more closely going forward.”
Focus on Security
The pandemic reinforced the role that DTCC plays in managing financial and non-financial risks, Gray said. This includes monitoring third parties to ensure the firm is aware of any potential implications, as well as working within the firm and with the industry to maintain security controls and training to protect against cyber-attacks while working remotely.
"Cybersecurity remains a top risk for DTCC and the industry, and we have maintained our vigilance," Gray said. The impact of the pandemic has shown that it is critical to continue working on cyber-resilience, "not necessarily because it has created additional risks, but it has emphasized the need to be prepared for extreme events as remote as they may seem," Gray said.
Modernizing Technology and the Process
The conversation on risk also focused on how the industry can experiment with and adopt new technology without jeopardizing market stability? Legacy systems performed optimally during the period of heightened volume and volatility, yet they can be inflexible as well as costly and time-consuming to enhance. As Bishop observed, “you don’t want to wait for a crisis to address a problem.” She said that any new technology needs to meet the high threshold of being more resilient, stable and secure than what’s currently used.
A significant opportunity exists to improve the client experience by replacing the myriad of legacy systems and interfaces with Application Programming Interfaces (APIs). The public cloud is another way that DTCC and the industry can improve time to market and quickly enable business capabilities. According to Bishop, “we’re excited to work with the industry on the next generation of the modernization of technology.”
Pozmanter emphasized that technology is an enabler of business strategy and that the real opportunity is to reimagine processes. By bringing a fresh perspective and new approaches to post-trade processing, “we can create cost efficiencies for DTCC, and balance sheet efficiencies for our clients.”
Bodson noted that both DTCC and the industry have started to move forward with modernization efforts. Two projects that improve current practices include Project Ion and Project Whitney. Project Ion seeks to further optimize the settlement process in the public markets, using distributed ledger technology to shorten the settlement cycle, from the current T+2 and eventually to T0. The initiative, which DTCC recently unveiled as a case study, would allow multiple settlement cycles and enable firms to enhance intraday cash and accommodate a system that runs parallel with existing processes. Project Whitney considers opportunities to provide increased levels of digitalization throughout the private market asset lifecycle, from issuance to asset servicing.
“As the pandemic evolves, we have seen some changes in the last few weeks—the industry is moving from “crisis” mode with an eye toward the strategic future,” Bodson said. “More and more, we are hearing about modernization, emerging technologies and new processes. There are still plenty of tactical issues to resolve but in our “business as unusual” environment, it’s clear that the industry has overcome challenges that will fundamentally alter the way we work. We are focused on that way forward.”