DTCC Pushing for Larger Industry Role
Before the Lehman Brothers collapse in September 2008, Depository Trust Clearing Corp. (DTCC), a post-trade industry utility, wasn't well known on buy-side trading desks. But in the heat of the financial crisis, institutional head traders called upon DTCC to help them resolve their exposures to the failing broker-dealer. In an exclusive interview with Advanced Trading, DTCC managing director of strategy and marketing Robert Hegarty, a well-known former TowerGroup analyst, explains how DTCC is connectong with the buy side while working to meet the evolving market structure's needs for faster processing and risk mitigation.
Tell us about your efforts to educate the buy side about DTCC's role in the markets.
Hegarty: When I was at Tower Group, the week of Sept. 15, 2008 [when Lehman collapsed], I received a number of calls from buy-side clients of mine - head traders mostly - asking, "Who is DTCC, and how can I get in touch with them?" It became evident that DTCC was integral to resolving the Lehman collapse by closing out $500 billion in market exposure with no loss to the industry.
In that respect, it made it very easy for us to go out to buy-side firms and educate them on who DTCC is and what a clearinghouse does, because the buy side is a step removed from all of this. It was really to let them understand what a clearinghouse does, what central counterparties are and the service we provide in mitigating risk, increasing efficiency and lowering the cost of the industry as a whole. We sat down and just gave them an understanding of what occurs after the trade is executed.
How did DTCC help the buy side during the crisis?
Hegarty: A good example of that is our MBS CCP service [a central counterparty for mortgage-backed securities]. Going back to the week of Sept. 15, [2008], Lehman Brothers had a large book of mortgage positions that needed to be liquidated in the marketplace, so we had to step in as central counterparty for a day. DTCC basically worked that book out.
What we were asked to do in a crisis - it became very apparent to the buy side that using a central counterparty would be a very good standard practice. They recognized the value of a CCP when they were able to participate in it for a day. They are able to resolve the open positions with a failed broker-dealer and be made whole. There's value in that kind of model, where they're paying for a service to help mitigate risk and protect themselves from the failure of a large firm.
What kinds of problems have buy-side firms asked DTCC to tackle?
Hegarty: We've heard everything from, "DTCC may want to take a look at the collateral management space," to, "DTCC may want to take a look at the commissions management space." These aren't initiatives that we have right now ongoing, but this is part of reaching out to our constituents - mainly trading desks and buy-side firms - to see where we can help. These are processes where the industry could probably use facilities that DTCC has been good at building in the past. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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