by Helen Cunningham
Michael Bodson became DTCC President and CEO July 1. He joined the company in 2007, following a 20-year career at Morgan Stanley. In this article, Bodson talks about topics including DTCC’s priorities, the company’s transformation into a global player and how re-regulation is changing the marketplace.
What are some of your priorities for the next three to five years?
The basic priorities remain the same, whether it’s today or five years forward. We need to make sure we have the right people; we need to remain focused on our core clearing and settlement functions and day-to-day risk responsibilities; and we need to be responsive to our clients’ needs.
Specific to the next three to five years, it will be critical to get the prioritization process right, because both the oppor-tunities and the demands on DTCC are increasing. We have to be disciplined and focused in deciding where to invest – and be realistic about not trying to do everything. We’re investing the industry’s money, and we’ve got to be prudent about the decisions we make.
Obviously, risk management will remain a priority. Post-2008, the industry, regulators and DTCC have done a lot of soul searching about the nature of risk. In the past, our view was focused on standard deviations and probabilities. Now we know that improbable events – the fat tails – are out there and can occur, often in ways you don’t expect. Knight Capital is the latest example. So we have to anticipate and prepare for those events, and when they occur, we have to learn from them.
Michael Bodson, DTCC President and CEO
How does DTCC plan for its growing risk responsibilities?
An area as complex and critical as risk requires a comprehensive framework. So with the support of the Board and in dialogue with our regulators, we undertook a fundamental review of how we manage risk. We have significantly strengthened the talent and capabilities of our risk organization, and we have developed a comprehensive strategic plan for risk, which includes a three-to-five-year investment in our risk infrastructure.
Risk management has always been central to everything we do at DTCC. In this new world, we have to further leverage our risk infrastructure and strengthen our capabilities to meet the ever-expanding demands. We also need to be able to adapt more quickly to changing market conditions. And all of that takes investment – in people, technology, processes and data.
Could you talk about technology at DTCC?
Technology is also a priority. We are revisiting how we architecture ourselves to address the reality that the game has changed in terms of trading volumes.
DTCC’s financial model has always been based on the concept of a huge processing engine with a fixed-cost base that handles large, ever-increasing volumes of transactions. The more volume and value-added services we pumped through that engine, the more we could lower the unit cost.
But equity trading has not recovered since 2008, and in an environment where volumes are flat to down, a high fixed-cost base is no longer the optimal structure. To continue cutting the industry’s costs, we’ll need to shift from a fixed-cost to a more variable-cost base, which represents a major change for DTCC – and it is going to be critical.
How is the company approaching this change?
Without doubt, it’s a massive challenge, particularly in the cash markets, where we have an entrenched infrastructure. We are reexamining our technology, our processes and our labor practices in light of the new environment – and just like every firm on Wall Street, we face some hard decisions.
Obviously, our clearing and settlement responsibilities will always be paramount. We have to provide safety, soundness and reliability. We cannot stumble.
At the same time, we’re looking for new ways to leverage that infrastructure by insourcing additional functions to help drive down the industry’s cost base. Our clients face tremendous pressures on their profit margins. They are reassessing their business models to identify areas that can potentially be outsourced – and that plays to our strengths for large-scale processing and strong execution.
We’ll also continue to strengthen the infrastructure. For example, we’ve redesigned our settlement platform to help clients reduce settlement risk and operate more efficiently. We’re working with the industry to analyze the costs and benefits of a shorter settlement cycle for equities, corporate and municipal bonds and UIT trades. And we rolled out a new central counterparty [CCP] this year – for mortgage-backed securities. It provides the first-ever trade guarantee in this market, and is cutting both operational risk and costs for clients.
We are leveraging the infrastructure in innovative ways, as well. For example, our NYPC [New York Portfolio Clearing] joint venture with NYSE Euronext is helping firms optimize capital, while strengthening risk controls. It offers one-pot margining across fixed income cash and futures trades, and we’re in discussions to expand the cross-margining arrangement to include interest rate swaps cleared by LCH.Clearnet. If we bring swaps into the equation, clients will gain additional margin-offset benefits and we’ll lower the overall risk profile for NYPC. So everybody wins.
We’re also diversifying our business. For instance, we’re making a large technology investment in our Global Trade Repository for OTC [over-the-counter] derivatives, and we will explore options to leverage this new platform to deliver value to the industry.
How has DTCC’s OTC derivatives business changed the company and perceptions of it?
DTCC has always been viewed as a strong service provider focused on risk mitigation, safety and soundness – primarily in the U.S. cash markets. The OTC derivatives business has helped transform DTCC into a global multi-product firm. It has changed our definition of ourselves and our role in the financial markets.
We first entered this space in 2003 with Deriv/SERV and have extended our role so that today we have the Global Trade Repository, or GTR.
This repository is a massive, highly complex, global project with aggressive time lines. The fact that the industry chose DTCC to build it is a huge vote of confidence in our capabilities – and not just as a technology provider, but also as a thought leader and industry organizer on a global scale.
In building and managing GTR, we have established a reputation for leadership, innovation, execution and the ability to solve complex problems and drive standardization. We’ve also demonstrated that we are a good global player, meaning we do large-scale, multijurisdictional projects very well. And we’ve built relationships with regulators in the U.S., Europe and Asia.
So GTR is really creating a new and more expansive perception of DTCC.
Another global project is the LEI [legal entity identifier] system; could you give us an update?
In July, DTCC and SWIFT were selected by the U.S. Commodity Futures Trading Commission [CFTC] to launch a new utility to begin assigning CFTC identifiers to firms trading in OTC derivatives, which is an important step for the LEI initiative.
Post-Lehman, the industry and regulators fully understand the importance of LEI. The ability to standardize the identi-fication of legal entities and access the data is now recognized as a critical tool for understanding exposures and managing systemic risk. It sounds basic, but it’s a complex problem that has never been solved.
Going forward, DTCC expects to play a significant role in the global LEI mandate in partnership with SWIFT and ANNA [Association of National Numbering Agencies]. The goal is to tackle this issue globally by leveraging our network, data and processing capabilities, along with the data-validation capabilities our Avox subsidiary has pioneered and the registration portal we deployed to support the CFTC.
Could you talk about how new regulations are changing the marketplace?
The new regulatory landscape is impacting everything from business practices to capital requirements to the level of marketplace oversight. And we’re working with our clients and regulators on many fronts to respond to the changes as quickly and cost-effectively as possible.
I believe we’re seeing a real breakthrough in how the market is responding to re-regulation and how the regulators view their roles. And these are major steps forward in global cooperation and oversight. For example, in the OTC derivatives market, the industry’s decision to use DTCC to build a repository for all five asset classes was a bold step forward. It is bringing transparency to the marketplace and really changing the paradigm of how regulators work with each other globally.
Where does the public fit into the picture?
Helping regulators understand where risk may be building is ushering in a new era of market transparency. And ultimately, that transparency helps restore public trust in the marketplace.
The public has to believe robust controls are in place. It’s crucial – not just for the industry, but for the economy. So whatever we can do, working with regulators, clients and our industry counterparts, to help regain that trust is critical. The work we’re doing in GTR, LEI and other areas will help immeasurably in getting that done.
How is DTCC itself navigating new regulatory requirements?
The re-regulation comes in many forms for infrastructure organizations.
We now have a much more robust dialogue with the regulators on a continuous basis, and we have a stronger regulatory presence on site.
Today, regulators have a better understanding of the infrastructure’s role in the markets. For instance, the report that spells out the new CPSS-IOSCO principles states that robust infrastructures play a critical role in financial stability. We are now in the advanced stages of a company-wide evaluation of those principles.
We are also addressing the financial challenges DTCC and the industry face in terms of the new capital requirements regulators are expected to impose on us, pending regulatory changes. Like our clients, we need to meet the new capital demands and also maintain strong fiscal discipline over our cost base. We have been working closely with our Board to think through these issues.
What is the impact of the SIFMU (Systemically Important Financial Market Utilities) designations by the Financial Stability Oversight Council?
This designation was given to three of our subsidiaries, NSCC, FICC and DTC, and we welcome it.
We expect the SIFMU status to increase the level of dialogue and communication with our regulators, but it won’t fundamentally change what we do on a day-to-day basis. We fully understand the importance of our subsidiaries and the responsibility we shoulder to provide stability and safety to the marketplace.
We view the SIFMU designations as another indication of the fact that regulators understand how all the pieces of the industry have to work smoothly. And setting a high bar is great. @