In a wide-ranging fireside chat for the SIFMA Annual Meeting, Mike Bodson, DTCC President and CEO, and SIFMA President and CEO Ken Bentsen discussed opportunities and challenges in the post-trade environment and how market infrastructures are positioned to lead digital innovation in the future. Bodson and Bentsen focused on topics that included accelerating the settlement cycle, automation in the private markets, best practices governing the adoption of distributed ledger technology (DLT) and the role of trusted intermediaries in the marketplace of the future.
Related: DTCC CEO Mike Bodson’s Three Principles for Innovating with DLT
The full video interview is available here (email address required). Parts of the discussion are summarized below:
What are benefits of shortening the US settlement cycle as well as challenges that the industry will need to overcome?
DTCC is working with SIFMA and ICI on blueprint to implement T+1. The benefits of accelerated settlement are well known—capital savings as the Value at Risk charge component of the margin would reduce by 40% on average, a reduction in settlement risk, improved operational processes and industry practices which should result in cost efficiencies. Challenges also are known: addressing legacy architecture, implementing new processes and the cost of upgrading systems, as well as the need for rigorous testing and industry coordination.
Can you explain the details of Project Ion, the alternative settlement service DTCC is developing?
Project Ion approaches accelerated settlement from a new direction: Using DLT to support optionality of settlement cycles—not just T+1 but T+0 settlement—while retaining the benefits of central netting, the trade guarantee of a CCP and preventing fragmentation of the clearing and settlement ecosystem. During this past year, DTCC built and tested a functional prototype using test data, an application programming interface (API) and DLT node, and is planning to launch the initial phase of the platform in the first quarter of 2022.
What prompted DTCC to explore the private markets, and how does Project Whitney address these challenges?
Companies are raising more money in the private markets, with the average growing from $43 million in 2006 to $222 million in 2021. Globally, there were 14 unicorns (private companies valued at more than $1 billion) in 2014; there were 342 so far this year. With U.S. companies increasingly staying private longer, investors have limited access to the private markets. DTCC determined it could help democratize the private markets by expanding investor access to growth-stage companies by identifying strategic opportunities to improve processes for issuers and to expand eligibility for private markets securities—a true white space.
Project Whitney is a modular, service-based platform to support the tokenization of assets throughout issuance, distribution and secondary transfer for private securities. Using DLT, APIs and cloud, the platform will allow DTCC to apply its regulated infrastructure and governance models, and make the private securities markets more efficient by streamlining manual processes, and reducing costs and risks.
DTCC has been at the forefront of experimenting with DLT and other new technologies. How do you adopt new technology while maintaining your risk management and resilience responsibilities?
New technology is critical for the long-term future of the industry, but firms must take a very disciplined approach to balance innovation and risk. It requires significant planning, coordination and communication throughout an organization and industry. The most important thing is to “do no harm.” Firms must ensure that new technologies, products or services provide the same, or greater, levels of risk management and protection for the industry. The benefit of technology is significant, but if the potential risk outweighs the benefit, it’s not a viable solution.
Which of new technologies do you think may have the most significant impact on or help transform financial markets in the coming years?
The growth of digital or tokenized assets is inevitable. Central bank digital currencies may be something we will see in some markets in the near term. The entirety of the tokenized asset world will be game changers with use of smart contracts profoundly impacting securities processing. Artificial intelligence will change everything from the retail customer experience to how trading happens to how we manage risk, from financial to operational to credit and cyber. Pertinent to SIFMA will be how fintechs, or maybe big tech, combine these technologies to fundamentally change our market structures and operating models. I don't think DeFi will destroy the banking and securities firms, but it will definitely force us to re-think our roles and how we do our jobs.
What are the main barriers to broad-based adoption of fintech, such as DLT, and what will be needed to address them?
DLT must have strong governing structure and standards to establish clear and consistent frameworks for DLT networks. Two years ago, DTCC collaborated with Accenture and issued a white paper outlining a governance operating model and tools for the DLT landscape. Platforms and systems must communicate and have interoperability as digitalization of all types of assets continues. It also has to make sense from a cost-benefit basis as firms have millions of dollars invested in legacy systems, and it's a big request to say, "write off that investment and make a bigger investment in new technology."
How do you see the role of trusted intermediaries evolving in a world of digital markets and tokenization? What role will DeFi play?
Trusted intermediaries will always be needed to ensure the safe, orderly and efficient operation of global financial markets. This was reinforced during the meme stock event when, despite extreme volume and volatility, all trading activity seamlessly cleared and settled. DTCC will need to evolve and redefine itself for the future. The markets will need gating agents, governance structures, standards setters, risk managers and dispute resolvers, but those roles will be handled in a different way. As more asset classes evolve into digitized forms, the role of trusted intermediaries will shift from a focus on “cash-versus securities clearing and settlement” to “asset transfer facilitators” to enable assets in different forms to be used for transactions.
Proponents of DeFi argue against the need for intermediaries. But rules aren’t just about control, they’re also about protecting investors from fraud and operational mistakes. That’s where financial intermediaries will play a critical role—some investors and traders may be willing trust in technology alone, but the vast majority want oversight, regulation and investor protection.