DTCC Connection

By Steven Adams and Mike Scotti

DTCC Connection recently spoke with Deriv/SERV CEO Chris Childs to discuss the state of derivatives processing – an area of the securities industry that has undergone rapid evolution since the financial crisis occurred nearly a decade ago.

And the pace of change for derivatives post-trade processing doesn’t appear to be slowing, with expected increases in regulatory reporting requirements and the role for new technology.

According to Childs, Deriv/SERV remains well positioned to continue to be a prominent player. Childs, a 15-year veteran of OTC trade processing, joined DTCC in 2007. He was previously Global Head of FX, Derivatives and Loan Operations at Citi, where he spent 21 years. Childs cited two reasons why Deriv/SERV has been a success since its launch five years ago: innovation and industry collaboration.

Besides his insights into the industry, Childs also highlighted a number of initiatives Deriv/SERV is undertaking. The company’s two main products are DTCC’s Global Trade Repository, or GTR, which is a regulatory reporting tool that gives transparency into the global derivatives marketplace, and the Trade Information Warehouse (TIW), an asset servicing platform that provides a “golden copy” record for credit default swaps (CDS) activity.

Upgraded Platforms

Both products are undergoing significant upgrades to their platforms, which aim to reduce both cost and risk for the industry. For GTR, the re-architecture of its infrastructure will continue over the next two years and will provide users with a more simplified application, a better user experience and greater stability.

In the case of TIW, Deriv/SERV is pioneering the use of distributed ledger technology (DLT) by converting its existing platform to one that will implement this cutting-edge technology. DLT has the potential to radically alter the post-trade process in a variety of ways, including reduced cost and increased data security.

Commitment to Client

Childs pointed out how Deriv/SERV’s focus on the client and being industry owned have enabled the company to forge strong partnerships with clients. “Unlike our competition, Deriv/SERV is entirely user-owned, with an independent board of senior OTC experts. This relationship sets us apart and allows us to work closely with the industry to develop solutions that meet our clients’ needs,” he said.

This has led to greater innovation, particularly true in the area of derivatives compliance, where banks have faced an uphill battle over the last five years to remain compliant with an ever-changing regulatory landscape.

“Deriv/SERV and the industry have stuck together, as the market has evolved, to make sure we’re delivering the products and services that allow our clients to remain in compliance,” Childs said, “and it’s been a close-working, collaborative effort.”

Rulemaking Continues

This formula has allowed GTR to remain the dominant global trade repository, despite a competitive and fragmented market, Childs said. And the need for collaboration continues, as new regulatory reporting rules continue to place additional demands on participants in the OTC derivatives business in all global jurisdictions.

He underscored the fact that Deriv/SERV’s current book of work is as big, if not bigger, than it was in 2012. “No one in the industry would have predicted that five years ago, but that’s the current reality,” he added.

It has not been an easy task for the industry and GTR to respond to new regulations. But Childs credits this success to his organization’s commitment to the industry to meet regulations and reduce risk. “We take our role very seriously,” he added.

TIW Meets DLT

The TIW has made tremendous strides to implement DLT, with a goal of re-platforming to the new technology in 2018. The TIW has established itself as the “golden copy” of record for the CDS market and is used not only to calculate and instruct payments on these transactions, but also to process credit events.

Up to this point, there has been significant investment by fintech companies and startups in developing proof-of-concepts. Yet not many firms have promised to deliver a live, operational, real-world model. DTCC made the decision to capitalize on the strength of its infrastructure, expertise and economies of scale to be the first organization to go live with a production version of this nascent, but highly-promising technology. The company is working in partnership with IBM, Axoni and R3.

Market Dominance

The maturity and stability of the TIW are the main reasons behind using DLT for this product. If successful, the plan will be to implement this technology across other DTCC business lines.

“We’re excited about this, and so is the industry,” Childs said. “Proof of concept is one thing, but we’re launching a true production system that manages the activity of an $11 trillion notional market.”

DLT has the potential to revolutionize many legacy back-office processes at financial institutions around the globe, Childs said. “If it lives up to the hype,” he added, “it has the ability to completely change the way the industry books and processes transactions.”