COMPARING GREEK AND ARGENTINE APPROACHES TO DEBT MANAGEMENT

THE EMERGING ROLE OF CCPS IN SECURITIES LENDING

I S S U E 6 2 • J U N E 2 0 1 2

THE DTCC LOOKS OUTHelping define the newfinancial world order

Threats and opportunityin block trading strategies

Defining market quality

Middle East assetmanagementsurvey update

The buy side banks ondisintermediation

Reprinted with kind permissionof Berlinguer Limited.

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MUCH IS EXPECTED ofMichael Bodson. Hisappointment, according to

Robert Druskin, DTCC’s executivechair, is part of the DTCC’s long termleadership succession strategy; and onthe surface is a natural progression onfrom outgoing chief executive DonDonahue. “His decade-plus of experi-ence with the DTCC, both as anindustry board member and morerecently, as a senior DTCC executivefor the past five years, [gives] him astrong understanding of DTCC’s oper-ations, systems and risk managementstrengths and the critical roles they play

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Michael C Bodson, who will becomeDTCC president and chief executiveofficer in July this year. Photographkindly supplied by the DTCC, June 2012.

Michael C Bodson inherits the crown at the Depository Trust &Clearing Corporation (DTCC) in July; at a time of substantialmarket change and market volatility. Moreover, he takes overat a critical juncture where the roles of trade repositories andclearers are under scrutiny and placed centre stage in the effortto minimise systemic risks in the global financial markets.Bodson has a tough steer. He must hone the DTCC through anoperational landscape that is in flux and (at the same time)develop a consistent global business outlook that is viable athome and exportable overseas. Can it be done? Is the DTCC anorganisation that can grab its destiny and run with new ideasand processes to meet the demands of the newly-emergingfinancial order? Or, buffeted by regulations and contradictorybusiness trends, will it end up mired in processes andbureaucracy? Francesca Carnevale spoke with Bodson about thechallenges and prospects.

CAN BODSON & THE DTCCRISE TO THE CHALLENGEOF MARKET CHANGE?

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in the financial markets ... The boardhas great confidence in his ability tolead DTCC.”

Bodson joined DTCC in 2007 asexecutive managing director forbusiness management and strategy,following a 20-year career withMorgan Stanley, having managed itsretail and asset management opera-tions. By 2010 he had become chiefoperating officer of the DTCC andthree of its subsidiaries (the DTC,NSCC and FICC), with enterprise-wide responsibility for IT andoperations. He has overseen the firm’sTrade Information Warehouse for overthe counter (OTC) derivatives andEuroCCP, DTCC’s European clearingand settlement organisation and beena board member of New York PortfolioClearing (NYPC), a joint venture withNYSE Euronext for clearing futures.

That CV has particular resonance forthe DTCC as it attempts to export itscapabilities even further around theworld to Asia’s emerging financialcentres. The infrastructure that the firmis building, particularly for the globalOTC derivatives market is a corner-stone of this outbound strategy.According to Bodson, over the last fewyears, the DTCC has been activelyreaching out to “Asian regulators,officials, infrastructure organisationsand market participants to make thecase for a single global repository tohouse OTC derivatives data”.

The unique selling points of thisstrategy are, says Bodson, manifoldand include helping regulatorsmanage systemic risk by “providingnear real time access to OTCderivatives data worldwide from asingle, comprehensive source, while atthe same time helping firms to betterunderstand counterparty exposures”.

Actually, it is a bold and a big ask;expecting conservative Asian regu-

lators to overcome national predilec-tions to enable reporting requirementsin multiple jurisdictions, utilising onesystem and enabling public disclosureof aggregated data to clarify markettrends and movements. “There is alsothe cost consideration,” nods Bodson,acknowledging the years of investmentand strategic planning that haveunderpinned this significant (ofpriority) business strategy.

Last year, he explains, the DTCCwon industry mandates to build OTCderivatives repositories for three assetclasses: interest rates, foreignexchange and commodities, inadditional to its ubiquitous servicescovering credit and equity derivatives.The logical next step then became theGlobal Trade Repository that willhouse global data sets across multipleasset classes, “with a single point ofconnectivity, backed up by geo-graphically dispersed centres of datacollection. For this repository tomitigate systemic risk effectively andon a global basis, it must capture datafrom all the major markets, includingthose in Asia, so that regulators haveaccess to global aggregated dataneeded for effective systemic riskoversight. It is clearly in the bestinterests of regulators, the industryand the general public to avoid thecreation of multiple infrastructuresand the resulting data fragmentation,”adds Bodson.

Interest rates and FXderivativesHe thinks the project is not only possi-ble, but inevitable. “Several Asianmarkets are significant players in OTCinterest rates and FX derivatives andthe value of contracts in those assetclasses dwarfs values in the creditdefault swaps market,” explains Bodson.To reinforce the point: according to arecent DTCC corporate newsletter, as of

June last year, outstanding contracts forinterest rate derivatives reached$553.9trn, of which 12% was denomi-nated in yen (equivalent to $65trn,double the value of the US-EuropeanCDS market).

He also points to the fact that manyAsian economies are in the middle ofsubstantial market reform. “A priorityis to bring greater transparency andrisk reduction to OTC derivativesmarkets. In fact, it is being drivenglobally and across all elements of thetrade process. You are seeing this ininitiatives such Legal Entity Identifiers(LEI), as well as regulationsemanating from Dodd-Frank in theUS, EMIR in Europe and variousdirectives from other non-govern-mental organisations. This was amplyexpressed by the Committee onPayment and Settlement Systems(CPSS) of the Bank for InternationalSettlements (BIS) in conjunction withthe International Organisation ofSecurities Commissions (IOSCO) inJanuary this year, for instance,”stresses Bodson,” which stressed theneed for central collection, mainten-ance and dissemination of OTCderivatives data by trade repositoriesto improve market transparency andhelp protect against market abuse.”

A number of wins are already inplace. In March this year DTCCpresented its Asia strategy at an OTCCDerivatives Regulators’ Forum. Japan’sFinancial Services Agency hasproposed legislation allowing foreigntrade repositories. Hong Kongmeanwhile has opted to build its ownrepository, “but agreed to use DTCC’sGlobal Trade Repository as an agent tosend and receive data, therebyadhering to global data collectionprinciples while still maintaining localdata control,” says Bodson.

This cuts to a critical issue for Asia’s

First published in FTSE Global Markets. Reprinted with kind permission of Berlinguer Limited.

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financial market authorities: whetherthe Global Trade Repository willguarantee them access and controlover their country specific data. Inparticular, if there were moves in thehistorically skittish North American orEuropean markets to limit data accessfor one reason or another, Asianregulators will want assurances thatthey can retain unfettered access totheir own data. In this regard, privacyand data disclosure are natrallysensitive areas. “We are working ongovernance and oversight models forAsia that will protect data and ensurethe independence of repositories,sharing standards and best practice,”holds Bodson.

Innovation and changemanagementDTCC’s breadth of vision in its Asiastrategy has taken the market by sur-prise, concedes Bodson. “Innovationand the ability to compete on a globalbasis are not attributes traditionallyassociated with the DTCC,” notedBodson in an internal paper in Decem-ber last year. “We’ve always had astrong reputation for safety, soundnessand execution capabilities in our corespace, but the industry has not alwaysrecognised DTCC for breaking newground,” he conceded. “I would say thatnow we are a much more fast-pacedand globally-oriented company.”

It is a view he still holds six monthson. “The industry has tended to under-estimate the spirit of innovation thatexists here. We have been quietly inno-vating for years, but post-2008 weshifted to high gear in response to theindustry’s more acute demand forinnovative solutions, driven by the reg-ulatory environment and changingeconomics in the financial sector. Theinitiatives around repositories and LEIare cases in point,” he avers. He alsopoints out that DTCC’s Trade Informa-

tion Warehouse, which houses data onOTC credit default swaps, predated theLehman’s crisis. In fact, he says: “Weused information in the Warehouse toreduce concerns and uncertainty aboutthe level of CDS exposure.”

He also highlights the DTCC’s com-petitive drive in the acquisition of Avox,a player in the global reference dataindustry as an example of the multi-layered approach to data collection,management and usage that charac-terises the firm’s tactical growth overthe last few years. “The Avox deal wastimely and opportunistic,” acknowl-edges Bodson. “By talking to people inthe data management, regulatory, leg-islative and academic communities, wesaw the LEI initiative coming. We knewthe industry and the regulators’ needfor accurate reference data on securitiesand legal entities to strengthen trans-parency and systemic risk managementwould be critical. Avox, which we feltwas a best in class provider of counter-party reference data was, in that regard,an ideal acquisition target,” he adds.

It is a high-fallutin’ imperative, butwith a practical end: “Right now, data isdrinking from the waterhose and it isoverwhelming. We have to put in placeplatforms and services that help filterthe right data for regulators to helpthem and the market have a moreaccurate view about what is going on.It is about data to information tounderstanding and ultimately towisdom,” holds Bodson. “In a complexworld, it is ultimately about pullingtogether the right data to allow peopleto do their jobs properly.”

In that context, Bodson views theevolution of strategy at DTCC as part ofa wider market process whereby allmajor financial market utilities andinstitutions are repositioning and refin-ing their remit to meet changingmarket circumstance. An advantage

for the DTCC is that as a principalmarket utility, it is a centralising force(enjoying almost monopolistic marketshare) and lives in peculiar territorywhich gives it hyper legitimacy (as amarket authority) and freedom ofaction (as a market entity). ThoughBodson believes that the DTCC doesnot always have its own way in theworld, “We are still very much subject tocompetition; we are certainly not insu-lated. Look at it this way: the downsideof monopoly is the concentration ofrisk and in a vertical situation youinvariably end up bundling price. Inthat context, it is inevitable that themarket will evolve and work towardsgreater efficiencies and innovation.That’s why we can never rest.”

“Everyone has their day in the sun,”concedes Bodson, and in terms of itsown particular zeitgeist, the DTCC isproving itself as a market driver in“improving the marketplace and refin-ing the global trade repository concept.Look, we are far from being all-seeing,all-knowing; but I venture that we arereally good at what we do. We haveastute and demanding board memberswho constantly ask: what have youdone for me lately?”

In that regard, he views his currenttenure as guardian of the flame: “I seeno need right now for a radical re-working of our overarching strategy.The focus is on efficiency, economy andpriority projects such as our GlobalTrade Repository. If nothing else, it willshow we can execute large scale proj-ects very effectively. At the other endhowever, is the expansion of the utilityspace in a fast evolving market. Will itall result in another Big Bang? No.Much will continue to look the same;but it will be the quality of the posttrade processes that will have beenupgraded significantly. It must give themarkets and regulators heart.”

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Ultimately, Bodson thinks the futurefor the DTCC is writ large in themandate that lies at the heart of USfinancial market regulation, as evincedmost latterly by Dodd Frank whichhighlights the question: what does itmean to regulate a marketplace?“Within that question lies a host ofpossibilities for the DTCC: servicingregulators in terms of the quality ofinformation that they can have at theirfingertips to ensure they can helpmanage and mitigate risk effectively.

Right now, everyone must go throughthis process of establishing what theirrole is in the new order of things andthe DTCC is very clear in its role astrade and data processor, serving boththe commercial and regulatory side ofthe business.”

Yet, it is clear that the DTCC’s ambi-tions are global rather than domesticand that brings a new resonance to itsrole as depositary and clearer; particu-larly as they are at the cornerstone ofmuch that is domestic regulation of

high risk derivatives and securitiestrading. It is a conundrum that Bodsonroundly acknowledges. It is in no wayeasy right now, he avers. “In some wayswe are dealing with those that unreal-istically want a riskless world. It is astruggle in that the question is con-stantly raised: whose money is at riskprecisely? That is a very pertinentquestion. Even so, there is a realisationthat a riskless world is not possible; butwhat is possible is proper considerationof risk and appropriate return.” �

THE DTCC IS calling for increased public-privateinformation sharing to protect the capital markets

from cyber-attacks. The company testified in early Junebefore a Congressional subcommittee that federalagencies and the financial sector must expandinformation sharing on cyber threats to more effectivelyprotect the capital markets from attack. DTCC alsocalled for restarting the Government InformationSharing Framework (GISF), a successful but now-defunct pilot programme that targeted cyber espionageas part of this information sharing effort. Mark Clancy,DTCC Managing Director and Corporate InformationSecurity Officer, told the House Capital Markets andGovernment Sponsored Enterprises Subcommitteeduring a June 1st hearing that the termination of theGISF programme in 2011 eliminated a critical source ofthreat data and analysis for the financial sector.

“While financial institutions have robust informationsecurity programmes in place to protect their systemsfrom cyber threats, they are not foolproof,” Clancy notedat the time. “A critical resource the industry relies uponto help safeguard the system is information sharingbetween federal agencies and the financial sector. DTCCstrongly supports restarting the GISF programme,removing its pilot status and expanding its reach withinthe financial sector to ensure that all resources areworking in concert to protect and defend the capitalmarkets from cyber-attack.”

The GISF programme kicked off back in 2010 as acollaboration between the Department of Defense(DoD), the Department of Homeland Security (DHS) andThe Financial Services–Information Sharing and AnalysisCenter (FS-ISAC), the primary group for information

sharing between the federal government and thefinancial sector. It allowed for the sharing of advancedthreat and attack data between the federal governmentand 16 financial services firms that were deemedcapable of protecting highly sensitive information. Theprogramme was expanded over time to include thesharing of classified technical and analytical data onthreat identification and mitigation techniques.

The DoD effectively terminated the GISF programme inDecember 2011, and information sharing through DHS,which was expected to continue, also ceased thatmonth. Since then several organisations in the financialsector have experienced threat activity from actors firstidentified to the industry through GISF reporting. Arecent FS-ISAC assessment found that these threats willcontinue to increase in the years ahead.

“Information sharing … represents the most criticalline of defense in managing and mitigating cyber risktoday,” Clancy said. “GISF drove innovative newinitiatives in the industry and helped reshape thesector’s approach to assessing cyber espionage riskswhile prompting pilot firms, including DTCC, to revisebest practices for managing threat information. It alsospurred financial institutions to make significantadditional investments in threat mitigation and detectioncapabilities that otherwise could not have been easilyjustified due to the lack of understanding of the risk tothe sector.” Clancy added that while GISF wassuccessful in many aspects, it should be expanded toinclude a broader group of financial institutions becausethe pilot programme’s reach and impact were toolimited and did not scale to the depth and breadth ofthe sector.

DTCC URGES RESTART OF THE FEDERAL PILOTPROGRAMME THAT TARGETED CYBER ESPIONAGE

First published in FTSE Global Markets. Reprinted with kind permission of Berlinguer Limited.

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