DTCC’s post-trade clearing and settlement and innovation leaders were prominently featured on the “Innovation - Key Transformation Initiatives” panel at the SIFMA Ops 2022 conference in Phoenix, Arizona.
Related: DTCC's Jennifer Peve on How We're Driving Innovation with Purpose
Moderated by Murray Pozmanter, DTCC Head of Clearing Agency Services and Global Business Operations, the panel included Michele Hillery, DTCC General Manager, Equity Clearing and DTC Settlement; Laura Klimpel, DTCC General Manager, Fixed Income Clearing Corporation & Head of SIFMU Business Development; and Jennifer Peve, DTCC Managing Director, Head of Strategy and Business Development.
Panelists discussed how DTCC is addressing some of the most complex operational challenges through key post-trade infrastructure initiatives. Here are a few highlights:
Pozmanter: How do you see the convergence of technology and client value?
Peve: These days most firms tend to focus on the use case rather than the underlying technology. This is a good starting point, but it’s important to drill down another level and understand the value clients expect. For example, we tend to drill into the value around the desire for distributed data, better automation, better data insights or better connectivity. This underlying value creation is what informs the technology decision. If your objective is to deliver distributed data, there are several technologies to consider—blockchain, cloud infrastructure and APIs are being adopted more fulsomely across industry. Each option can deliver value for you and your client, which is what we are all striving to achieve through any innovation.
Pozmanter: Can you provide an update on how we are preparing for T+1? And strategically, how does this fit into DTCC's modernization efforts?
Hillery: Tactically, DTCC, SIFMA and ICI are working to build out and publish a high-level business requirements document. DTCC is also creating a DTCC-specific requirements document which will be published over the course of the summer with detailed user test cases to follow. We are replaying the T+2 model but customizing it for T+1.
Strategically, we have reviewed our existing processes and workflows and found opportunities to smoothen out points of friction in the system. This will help us deliver improved settlement outcomes, such as partial settlements of buy-side activity, introduce operational efficiencies, and drive efficiency around the use of capital and in our risk management model. It is critical that we still maintain our safety and security through the CCP model, all while improving standardization and driving change with data insights. To that end, we are standardizing our data models across the enterprise to facilitate data analytics.
To support market structure changes, the underlying technology architecture must be able to meet future demands. DTCC's modernization efforts will support this through user centric design, built for resiliency, security, scalability and continuous availability. This supports business objectives, for example, if markets evolve to extended hours, we can nimbly adjust to support the needs. One of the highlights of this is Ion, our DLT platform. We have built it from prototype and we are about to have a production release in June.
Related: Get Caught Up with the Accelerating to T+1 Series
Pozmanter: What will be the indicators if we are going to continue with a DLT implementation – or build those lessons learned into existing technologies?
Hillery: We are about to launch our first use case into production which will settle a subset of DTC activity. Although contained versus the full US markets, it is an important first step towards confirming the potential of DLT in key areas like scalability, resiliency and security of DLT. And if we determine DLT does not deliver appropriate scalability and resiliency, then we will need to consider if it is a question of maturity or if it is the right underpinning technology.
As an industry, we need to ask: are you ready to commit to driving change to your internal infrastructure to embed DLT into your systems, and harness its value? It is a journey to understand how, when, and if to embed DLT. If the answer is yes, then we progress forward. If the answer is along the lines of “this is more complicated than necessary,” then it is a different conversation.
Peve: One technology is not 100% better than another. It is about the value you get out of it, and how you modernize the infrastructure in a way to set you up for future success. Our focus should be on ways to get there over time because “big bangs” are very difficult and complex.
Pozmanter: There have been broad industry conversations in the fixed income space about bringing more assets into clearing. Can you elaborate on what is driving those conversations? What types of reform are on the table, and how will FICC prepare for a clearing mandate?
Klimpel: Concerns around volatility and liquidity have promoted a series of white papers issued by market participants and public policy officials, talking about whether there is a need to reform the structure of the treasury market, and what kinds of reforms might be warranted. There are potential changes to capital rules to better incentivize dealers to intermediate during times of market stress, expansion of trace reporting to capture all Treasury and Treasury repo transactions, expansion of Regulation ATS to capture significant trading platforms. And the one that touches us at FICC most directly is a potential expansion of the amount of Treasury activity in central clearing.
FICC clears roughly a quarter of all Treasury market activity daily. We offer multilateral netted settlement, such that all members of the CCP have their Treasury activity netted down to a single position, eliminating a lot of operational risk and the risk of failure to deliver to the market. Economic incentives have attracted the buyside who are coming in through our Sponsored Service. We have seen that community interested in using our product: we currently have 32 sponsoring members and almost 2,000 funds who are using it. We are continuing to see expansion and growth in the product, whether or not central clearing might be prescribed or mandated going forward.
The conversation about Treasury market reform has been a great opportunity for us at FICC to call out some of the “frictions” in the regulatory framework that we have observed. There is a good opportunity to have these issues focused on – and hopefully resolved.
Related: Making the U.S. Treasury Market Safer for All Participants
Pozmanter: Looking at the work done on the Fixed Income side and the lessons learned, can you talk about the work being done on equities side with cleared securities lending? How does that play into the Sponsored service and modernization efforts?
Klimpel: SFT Clearing service is a brand-new service that is going to add a financing product to NSCC, targeted to cleared sec lending. We looked at what worked in the Fixed Income space: the product is built to be balance sheet nettable for the first time, which is an exciting innovation. We built multiple buy-side clearing models into the product, very similar to the Fixed Income sponsored product, with which we have had great success. We expect many of the same players will want to use both products. We are very close to approval.
Hillery: From a modernization point of view, you see the theme of “repeat / reuse” flexibility built into the system. We are pulling and drawing from FICC and customizing to work in the equities space. Reusing the foundational components and building on the customization is one of our key tenets of modernization.
Pozmanter: From DTCC’s perspective on the issue of accelerated settlement, how do we analyze the opportunity for T+1 versus a move to T+0?
Hillery: For now, DTCC’s view is that we need to keep our focus on T+1. With T+1 we realize significant capital efficiencies and it allows us to drive adoption of standards across the industry. T+1 is happening. But we should also start to have conversations around T+0. When we accomplish T+1, we are going to take about 40% of clearing fund out of the VaR calculation; we can expect additional reductions in clearing fund if we move to T+0.
As an industry, we need to commit to doing the analysis. I think there is a lot of confusion about what T+0 means. There are various flavors of it – real time gross settlement, netted end-of-day settlement or even netted intraday settlement cycles, and we need to understand the repercussions of each. There are global considerations, and it must be thought through to understand the costs and the benefits.
For DTCC this is not a technology conversation, our systems handle T+0 settlements today; this is a market structure conversation. As we modernize, we are making our systems “settlement cycle agnostic.” So, if you want to settle on T+0, T+1 or T+2, all of the technology will be built out to support that.
Pozmanter: How does conventional clearing and settlement co-exist among the world of digital assets?
Peve: There are multiple paradigms and they lean on new technologies. The reality of innovation is that it can result in fragmentation. The opportunity for DTCC – and our role in the industry – is to reduce fragmentation, complexity, costs, and manual processing. We must consider how we achieve bringing traditional and digital assets together. For example, we are working with the Digital Dollar Group to test DvP settlement against a US CBDC and evaluate the value/challenges it could bring.
Hillery: Experimenting in partnership with the industry – for example, Project Ion and Digital Securities Management (DSM) – has allowed us to clearly identify the parts that work, and thus take them forward into production.