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by Helen Cunningham

Related Information

  • Five-for-Five

  • 2011 Honors for Innovation

  • NYPC Awarded 'Best Innovation by a Clearinghouse, North America

  • Innovation and the ability to compete on a global basis are not attributes traditionally associated with DTCC, according to Michael Bodson, DTCC’s COO. “We’ve always had a strong reputation for safety, soundness and execution capabilities in our core space but the industry has not always recognized DTCC for breaking new ground,” he said.

    DTCC’s customer survey ratings reflect this view. In 2011, the satisfaction score for innovation was 81%, up 8 points from 73% five years ago, but still trailing scores for other key categories, such as 90% for commitment to quality.

    Now, with the steady rollout of innovative services DTCC has delivered since the 2008 economic crisis, industry perceptions of DTCC’s ability to innovate are giving way to a new – and more accurate – view.

    “The industry has tended to underestimate the innovative spirit that exists at DTCC,” said Bodson. “We’ve been quietly innovating for years, but post- 2008, we shifted to high gear in response to the industry’s more acute demand for innovative solutions, driven by the new regulatory environment and changing economics in the financial sector.”

    Three years on, DTCC has established a highly visible track record for innovation and competitiveness. “We have been out front with creative solutions that are making a big difference in the industry globally, particularly in terms of risk management,” Bodson said. The repositories for over-the-counter (OTC) derivatives and the global legal entity identifier (LEI) system are two cases in point.

    Foresight and data transparency

    DTCC rolled out its Trade Information Warehouse, which houses data on OTC credit default swaps (CDS) globally, in 2006, well before the 2008 collapse of Lehman Brothers.

    “It is not widely known that as the fallout from Lehman was rippling across the markets, we used information in the Warehouse to reduce concerns and uncertainty about the level of CDS exposure,” said Bodson. “The regulators were quick to appreciate the Warehouse’s value for delivering transparency and systemic risk management in this market, and the concept of repositories for other asset classes evolved from that experience.”

    Since then, DTCC has won mandates to build four additional repositories: for equity, interest rates, foreign exchange and commodities OTC derivatives. “We are five-for-five with swap data repositories,” said Bodson, adding that DTCC won three repository bidding processes by partnering with industry counterparts. (See articles, pages 8-13.)

    Ahead of the curve

    One of DTCC’s competitive strengths is its ability to identify emerging trends in the industry and anticipate their impact on customers, said Bodson. The 2010 acquisition of Avox, an established player in the global reference data industry, is an example of how knowledge of the industry and its needs comes into play.

    “The Avox deal was timely and opportunistic,” said Bodson. “By talking to people in the data management, regulatory, legislative and academic communities, we saw the LEI initiative coming. We knew the industry and regulators’ need for accurate reference data on securities and legal entities to strengthen transparency and systemic risk management would be critical given the coming legislation. To help solve that problem we needed to fill a gap in our own reference data capabilities. So Avox, the best in class for counterparty reference data, was an ideal target.”

    The acquisition set the stage for DTCC to team with SWIFT and the International Organization for Standardization in 2011 to receive the industry recommendation to develop the global LEI. This system will assign a unique code to each counterparty to financial transactions, and validate basic information about the entity, introducing a standard that will help regulators and market participants better manage risk and exposures on a global scale.

    Formula for success

    What are other factors that contribute to DTCC’s ability to innovate and compete?

    “We have demonstrated our willingness to take a leadership role and we have a Board of Directors that is increasingly supportive of that role,” Bodson said. “What’s more, the opportunities are greater in number and in scope today, because customers are looking to DTCC more than ever to help them manage risk, deal with increased regulation, contain costs and solve emerging problems.”

    DTCC is also working more closely with regulators post-2008 because their need for a holistic understanding of risk in the financial system has increased tremendously. “Given our capabilities and track record, the regulators are looking to DTCC on a global basis as providers of information and insights, which strengthens what was already a strong relationship,” Bodson said.

    He cited a list of other factors that drive innovation, including DTCC’s existing capabilities and capacity to envision ways to extend them to new areas of the business; a proven ability to anticipate where the industry is going, and to identify emerging needs and front-run gaps in services; a record for successful execution; openness to forging partnerships that advance industry goals; and the company’s people, who have unique knowledge of the industry and its requirements.

    Reputation globally

    DTCC’s growing global reputation is another plus.

    “In Europe, DTCC has established a leadership role for bringing greater competition to equities clearing and for collaborating with customers to drive down costs and tackle challenges such as interoperability,” Bodson said.

    For example, DTCC’s EuroCCP subsidiary worked with BATS Europe, a pan- European trading platform, to launch “preferred clearing” in 2011. The service, which advances interoperability across Europe, received the Editor’s Choice award in the 2011 Financial News Awards for Excellence in Trading & Technology, Europe. “Firms can choose different clearing houses via BATS and the respective clearing houses pass trades on to one another in a radical new model often known as interoperability,” wrote Financial News.

    The preferred clearing service, which is essentially a partial implementation of interoperability, has brought a new chapter to European equities clearing, according to Bodson. “For the first time, trading firms in Europe have the option to select their clearing house among several options, which gives them the potential to reduce margin requirements and settlement fees by centralizing their clearing activities. Although preferred clearing is only a partial solution, it is the catalyst needed to open up the market fully to effective competition.”

    For its part, EuroCCP was named 2011’s Best Clearing House in Europe for the second year in a row by the Financial News Awards for Excellence in Trading & Technology, Europe. (See article at right.)

    ‘Virtuous cycle’

    DTCC’s growing stature on the innovation and competitiveness scale is based on its record for delivering creative solutions that meet industry requirements to reduce the risk and cost of doing business, while increasing overall operational efficiency, summed up Bodson.

    “Today, market participants and regulators around the globe increasingly turn to DTCC for innovative, costeffective solutions for the many challenges facing the financial industry,” he said. “It creates a virtuous cycle.” @