Panelists l to r: Peter Axilrod, Managing Director, Head of Strategy and Business Development, DTCC; Patrick Parkinson, Managing Director, Promontory Financial Group; Bill Hughes, Managing Director and Operations Regional Head Americas, Credit Suisse; Darryll Hendricks, Chief Operating Officer, Non-Core & Legacy Division, UBS.
Restoring trust in financial services is essential for the industry to break out of the difficult business climate of the last several years, spur long-term growth and ensure it can continue helping investors prepare for the future.
Industry leaders and executives from DTCC discussed ways to navigate this post-crisis environment and the role financial market infrastructures (FMIs) play in rebuilding trust. The conversations took place at the DTCC Client Forum 2015, where the topic of trust kicked off the meeting in the keynote address from DTCC President and CEO Michael Bodson.
“I believe responsible risk management with appropriate regulatory oversight is the key building block to winning back the public trust,” Bodson told the more than 100 Forum participants. “While FMIs come in many shapes and sizes, and have varying incentives based on different operating models, competing priorities and business objectives, we all share a common goal – to monitor, manage and mitigate risk in all its forms in order to protect the stability of the marketplace and the integrity of the financial system.”
Panels Discuss Mutualizing Post-Trade Processes
Significant changes are transforming the global marketplace, requiring financial market infrastructures (FMIs) to seek new ways to increase transparency and reduce costs and risks.
This is true at DTCC both in its Systemically Important Financial Market Utility (SIFMU) core businesses, as well as the solutions businesses designed for enhancing operational efficiencies and reducing costs by standardizing, automating and mutualizing non-differentiating processes.
Two panels at the DTCC Client Forum 2015 explored the avenues DTCC uses to deliver those services to the industry. The first panel, “Building Strength and Resilience for the Future,” was moderated by Murray Pozmanter, DTCC Managing Director and Head of Clearing Agency Services. Pozmanter led a discussion of the key initiatives for DTCC’s core business and the role they play in building stability, trust and transparency in the global financial markets.
Joining Pozmanter were Thomas Callahan, Managing Director, Co-Head of BlackRock Global Cash Management Business; Thomas Price, Managing Director, Technology, Operations & Business Continuity, SIFMA; and Dan Thieke, Managing Director and General Manager, Settlement & Asset Services, DTCC. They focused on topics of reducing risk, such as the corporate action transformation initiative.
The corporate actions initiative will standardize the manual way clients interact today—using ISO messaging—providing greater straight-through processing for higher levels of efficiency and reduced risk. Another topic discussed was central clearing for institutional tri-party repo transactions, an imperative for regulators and legislators since the financial crisis to try to fix stress points and weaknesses in the marketplace. DTCC’s GCF Repo already provided clearing for the dealer-to-dealer market, and the Fixed Income Clearing Corporation, a DTCC subsidiary, is in the process of drafting a rule filing for the institutional space—a filing one panelist called an elegant solution.
The panel also looked at the effort to reduce risk through shortening the settlement cycle to T+2. This industry-wide initiative is in its due diligence stage and the panel noted a white paper would soon be published as a key early step in the process.
All the topics covered in the panel involved significant levels of collaboration between DTCC and various parts of the industry.
Andrew Gray, DTCC Managing Director, Group Chief Risk Officer, moderated the second panel, “Creating Value Through Partnerships,” that looked at the innovative solutions for greater efficiency DTCC’s collaboration and strategic partnerships have brought to the industry. Gray’s panel dove more directly into the subject of collaboration, discussing DTCC’s partnerships that are driving value across the industry.
A common theme for Gray’s panel was discussion of functions that do not provide firms with a competitive or economic advantage and can be performed more efficiently as a mutualized service supporting the entire industry. For example, they discussed Clarient Entity HubTM, which centralizes data for client onboarding into one hub. This provides consistency for compliance and KYC regulatory requirements.
Omgeo’s partnership with the industry to develop a global Standing Settlement Instructions Utility points to the realization that firms don’t need to own every piece of the technology stack if the governance is done right, the panel noted. The direct and indirect consequences of regulatory reform on collateral were highlighted by the panel as the catalyst behind the formation of DTCC-Euroclear Global Ltd. The joint venture will leverage both companies’ expertise, technology and franchises to develop and streamline margin settlement processes and enhance access to securities collateral worldwide, improving the stability and soundness of financial markets.
In one of the hottest topics in the news today—cyber security—the panel also looked at SoltraTM, a joint venture with the Financial Services Information Sharing and Analysis Center that is developing solutions to help firms defend against cyber attack.
Gray’s panel consisted of Mark Clancy, CEO, Soltra and Chief Information Security Officer, DTCC; Ted Leveroni, Chief Commercial Officer, DTCC-Euroclear Global Collateral Ltd.; Matthew Nelson, Managing Director, Omgeo Global Product and Strategy, DTCC; and John Rodefeld, Managing Director, Global Head of Collateral, Liquidity, and Funding Team, Barclays.
Bodson noted the unique position DTCC holds as it is user owned and governed. “Our Board of Directors and our shareholders are also our clients,” he said. “Our interests and objectives are completely aligned with our clients, who are also the firms whose capital and core business is on the line at DTCC. Our primary focus is on addressing industry needs and protecting market stability, especially critical during times of crisis.”
Rethinking the Industry Operating Model
This view of DTCC’s unique position in the industry carried on through the Forum’s panels looking at strategic projects now underway. This concept was central to the panel “Rethinking the Industry Operating Model.”
That panel, made up of Darryll Hendricks, Chief Operating Officer, Non-Core & Legacy Division at UBS; Bill Hughes, Managing Director and Operations Regional Head Americas at Credit Suisse; and Patrick Parkinson, Managing Director at Promontory Financial Group, and moderated by Peter Axilrod, Managing Director, Head of Strategy and Business Development at DTCC, examined the broader role FMIs can play in helping market participants manage difficult economic and regulatory demands.
There was clear consensus on the panel that we are in a difficult period for banks—and would be for some time to come. Panel members related this back to the issue of trust Bodson raised at the start of the Forum saying the view today is that banks are too big and too complex, and that the complexity is generally tied back to securities market activities.
The panelists said this changing environment increases the importance of FMI services, such as clearing of tri-party repos, from something nice-to-have to a necessity. Another panelist also suggested the buy-side would become increasingly important to the services DTCC provides, a shift of focus from the big banks that have traditionally been DTCC’s major clients.
Providing operational efficiency and cost savings, however, were key attributes the panel saw in DTCC’s role in the industry, as well as the ability to help clients navigate this environment.
After the boom years, there are difficult but inevitable transitions ahead. There are additional costs for governance and compliance, and there are higher regulatory capital requirements for FMIs that have further strained capital in the markets. These costs are driving significant changes in the way businesses operate.
Transforming the Cost Structure
While recognizing technology and infrastructure costs must be brought down, the panelists noted firms also recognized the difficulty in cutting these costs individually, leading to combined efforts to transform the cost structure.
Critical to determining what functions should be shifted away from the firms was ensuring there could be real cost savings from an economy of scale while not sacrificing a service that differentiated a firm with its clients or was a key revenue generator. The outsourced service could not be one viewed as critical to the firm’s risk management or governance process. In addition, any service which is outsourced would still have to have adequate oversight and governance of the shared function by the impacted stakeholders.
It is in this area of enhancing operational efficiencies and reducing costs by standardizing, automating and mutualizing non-differentiating post-trade processes that DTCC efforts with the industry drew praise from the panel.
Bob Druskin, Executive Chairman of DTCC, said these initiatives, as well as strategic partnerships, were essential for building stability, trust and transparency in the global financial markets—crucial elements in today’s environment.
“It’s clear the times are changing and there is a different paradigm today,” Druskin said. “DTCC is very well positioned for this change.”