The DTCC gorilla learns to tap dance By Gillian Tett
Thu Jun 8, 3:35 PM ET
In recent years, the Depository Trust & Clearing Corporation, the US's main platform for clearing and settling securities trades, has kept well out of the public eye.
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For though the group is a veritable behemoth - it cleared an eye-popping $1.4quadrillion worth of securities last year - it has traditionally been so slow-moving that bankers often describe the institution as a utility.
But now this vast corporation, which is jointly owned by the leading US investment banks, is trying to shake off its shackles. For as the DTCC has watched its clients in the financial world move their focus away from exchange-traded equities and bonds to over-the-counter derivatives in recent years, it has realised that it needs to keep up.
More specifically, behind the scenes the group has been quietly plotting how to shift out of the unglamorous business of back-office equities and fixed income settlement into the more exciting front-office world of over-the-counter derivatives instead.
"We are following our customers, we are trying to change," says Stuart Goldstein, chief spokesman of the DTCC. "The old image of the DTCC was an 800lb gorilla. But now this gorilla is learning to tap dance." The latest sign of this attempted "tap dancing" emerged on Thursday: the DTCC unveiled plans to create a new trade affirmation system for credit derivatives called Affirm-Xpress, which it has developed in conjunction with three of the world's largest interdealer brokers, Tullett Prebon, GFI and ICAP group.
The project marks a rare burst of collaboration between these three dealers, who are usually staunch rivals. But they have come together hoping that this platform will help boost the derivatives market overall. For what this system essentially does is let traders operating in the front office of a bank "affirm" - or agree - any trades they make electronically.
This can then be coordinated with a second electronic system that the DTCC developed two years ago for the back office, known as Deriv/Serv, which lets traders confirm such trades in a legally binding manner, also electronically.
Thus, added together, the two systems create the holy grail of electronic trading: a "one-stop" platform for conducting an entire trade on a computer screen without any need to resort to paper at all. "This is the first time we have gone into the front office," says Mr Goldstein.
For regulators, Affirm-Xpress is undoubtedly a thoroughly welcome development. In the last year central bankers and regulators have issued a host of warnings about the risks posed to the financial system from lax trading practices in credit derivatives. In particular, the widespread practice of using paper to settle trades has created a huge potential for human error - and doubly so, given the explosive growth in this credit derivatives sector, which is now estimated to be worth some $17,000bn.
Nevertheless, it remains to be seen whether the DTCC's new system is endorsed by all in the financial industry. In the last year, some small entrepreneurial companies have tried to respond to the problem by providing various solutions of their own. Creditex, a US group, for example, has created a credit derivatives trading system; T-Zero, another company, offers affirmation services; meanwhile, Markit, a derivatives pricing and valuation group, last month bought Communicator, which provides post-trade services including trade affirmation. Some bankers argue that it would be better if the industry continued to rely on these entrepreneurial groups in the fast-moving parts of the market, particularly given the extraordinarily dominant role that the DTCC enjoys in the US.
However, the official rhetoric from DTCC is that these new systems can coexist, given that groups such as T-Zero are focusing on the dealer-customer link, while the AffirmXpress system will be focused on the interdealer market.
And there is little likelihood that DTCC would agree to water down its ambitions. In the early months, for example, AffirmXpress - which goes live this summer - will just be used by the three interdealer brokers and their clients, the group says. However, eventually DTCC wants to roll the system across the industry, and then move into new areas of front-office trading in equity and interest rate derivatives as well.
That could leave it head-to-head with some exchanges and possibly some of the dealer banks as well. But as Mr Goldstein says: "Our board is saying: 'Go global!' We have to move into new areas."
Additional reporting by Richard Beales |
