Michael Bodson, DTCC President and CEO
A veteran panel of executives in financial services, including Michael Bodson, DTCC’s President and CEO, joined in a discussion on the current state of the financial services industry and the challenges it faces.
The event was hosted by the Gartland & Mellina Group, a management consulting company that serves the financial industry. The panel focused on regulation, technology, globalization and growth before the financial crisis, and how those areas have since changed and evolved. Today, the industry is looking at re-regulation, de-globalization and the potential impact disruptive technologies could have on operations.
Vikram Pandit, Chairman of TCG and former CEO of Citigroup, moderated the discussion. In addition to Bodson, panelists included Wall Street veterans Arthur Levitt, former Chairman of the SEC, Tom Glocer, former CEO of Thomson Reuters, and Brad Hintz, a former longtime securities analyst at Sanford C. Bernstein and current adjunct professor at New York University’s Stern School of Business.
Bending the Cost Curve
The panel devoted a considerable amount of time to discussing the cost impact of new regulations and their impact on return on equity, which has dropped from pre-crisis highs in the mid 20s to the low teens or single digits today. Bodson explained the role that industry utilities can play in helping firms further reduce their processing costs while enhancing efficiencies.
Bodson pointed to a study commissioned by DTCC that found the post-trade ecosystem in the United States and Europe totals about $100 billion annually, but the industry’s utilities, such as DTCC, LCH, Euroclear, OCC and Swift, account for only about 5% of that cost.
“The key takeaway for us was that the current operating model is not sustainable due to increasing costs and ongoing regulatory and compliance pressures on the banks,” Bodson said. “We see significant opportunities for market infrastructures to support the industry by partnering to develop large-scale shared services that utilitize certain non-differentiating, non-competitive industry functions and processes.”
Bodson offered a number of examples of the shared utility model, including Clarient Global LLC, DTCC’s joint venture with six global banks to address challenges related to client reference data and documentation, and DTCC-Euroclear GlobalCollateral Ltd., DTCC’s joint venture with Euroclear to develop and streamline margin settlement processes and enhance access to securities collateral worldwide He also pointed to DTCC’s joint venture with FS-ISAC to create Soltra, which is helping critical infrastructures across industries combat the threat of cyber attack.
“Clearly, a lot of progress has been made in a relatively short amount of time, but we are committed to working with our industry partners to keep exploring innovative new ways we can help further reduce costs and mitigate risks,” Bodson said.
Dialogue Around Blockchain
The panel also focused on disruptive technologies, such as distributed ledgers and how they may impact market infrastructures.
“Blockchain may be the most overhyped and misunderstood technology right now,” Bodson said. “While we strongly believe there is a lot of potential to leverage this technology, some of the use cases we are hearing about seem misdirected. The real power of this technology lies in having a common ledger accessible to the entire marketplace with proper permissioning and encryption, but we will only realize the full benefits if the industry works together collaboratively on achieving the building blocks.”
Bodson said DTCC is making a significant investment in exploring how the firm can build solutions that address key industry pain points where automation is limited or non-existent. However, he noted the challenges of moving to a distributed ledger because the current back-office infrastructure is so tightly integrated into every bank.
“The question is, ‘How do banks transition from today to tomorrow without incurring massive new amounts of cost?’” Bodson said. “This is a shared struggle when implementing a new technology.”
Globalization Here to Stay
On the topic of de-globalization, Bodson was asked about collaboration among the world’s major financial markets and economies and whether he sees the industry moving away from globalization. He firmly disagreed with the idea of any ongoing de-globalization in the industry.
“As an industry, we are global. We are going through the impact of re-regulation, but the genie is out of the bottle. Clients are still global and, therefore, banks will have to be global,” Bodson said. “Short term, cyclical impacts may slow things down, but globalization will not go away.”
Please click for a complete recap of the discussion.