A Conversation with Mike Bodson, CEO of DTCC

The following transcript is taken from season one, episode one of The Scoop, The Block's new podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback to [email protected]. This transcript has been edited for clarity and length.

In this episode of The Scoop, Frank Chaparro and Ryan Todd interview Mike Bodson, CEO of DTCC. The Depository Trust & Clearing Corporation is a 5,000 person operation that touches every corner of Wall Street, handling 1.8 quadrillion dollars of trades every year, flipping the GDP every three days. DTCC also operates a custodial service, securing 54 trillion dollars worth of securities, mostly in electronic form. Mike discusses Wall Street's adoption of distributed ledger technology, cryptocurrency valuations, and how Superstorm Sandy almost wiped out 35 trillion dollars.

Frank Chaparro Howdy folks this is Frank Chaparro senior correspondent at The Block. And welcome to The Scoop. Blockchain technology has long been touted as a force that would be able to disintermediate Wall Street banks and since its genesis however power players across the street have dismissed it. "Bitcoin's a fraud. Blockchain is overhyped." But Mike Bodson is one CEO who recognizes the power of crypto and has even said blockchain will make his firm disappear. That firm is DTCC, a 5,000 person operation that touches just about every corner of Wall Street, providing custody and clearing services. My colleague Ryan Todd and I visited bots in DTCC Jersey City headquarters. We explored what the firm, which processes over a quadrillion trades a year, does exactly, how it's embracing blockchain technology, and for good measure we dove into some old war stories. I hope you enjoy.

We're the back office of the back office

Frank So I'm really excited to have this conversation. I'm really excited to have Ryan Todd joining me for this conversation with the CEO of DTCC, Mike Bodson. This isn't the first time we've met. What was it two three weeks ago?

Mike Bodson Three weeks ago.

Frank FIA Boca. Ryan was asking me about Boca on the car ride over. We're in Jersey City by the way.

Mike Beautiful Jersey City.

Frank Beautiful Jersey City we made the venture over here from New York. Yeah it was at the wine event.

Mike We had a little cocktail reception for our clients and friends.

Frank And I snuck in right. Technically I don't even know if I was invited. They just saw me there.

Mike Yeah I think we just saw you walking there and grabbed you and said come on in.

Frank Exactly.

Mike We gave you the cheap wine though.

Frank The Shiraz.

Mike The Shiraz, the bad Shiraz.

Frank So let's start. I guess the best place to start is what is DTCC? So many people they recognize big financial players whether it's an investment bank like Goldman Sachs which is not too far downtown or you know a brokerage firm. You know you think the Instinets of the world but behind the scenes of everything is your company, 5,000 people. It's really the pipes and plumbing of Wall Street.

Mike We are the plumbers of Wall Street.

Frank Exactly clearing, custody, settlement don't forget settlement.

Mike Don't forget settlement, it's very important.

Frank So how do you explain it to you know if you have your 14 year old nephew come up to you and say...

Mike There is no explanation.

Frank Uncle Mike, explain this to me. This makes no sense. What's a post trade?

Mike What's a post trade? So we're probably the most important financial company that very few people know about. And we are the sole providers of the services: clearings, settlement, custody for the US cash securities markets, so stocks, bonds, mutual bonds, treasuries, mortgage backs, across the whole world. And the way the markets work is you know even though you may buy a security today for instance with the stock you're not going to actually pay for it for three days. So in that timespan there is risk and we help manage that risk. So on a normal day we'll do about 100 million transactions will flow through us. We get them from about 50 different trading venues, so the stock exchanges as well as individual firms and various other markets that are out there. We take those hundred million trades and we net them down to 3 million. So somebody like Goldman Sachs, you mentioned, will be trading in and out of Apple all day long. So instead of doing every trade individually and saying "I've got to pay Morgan Stanley for this; I got to receive stock from Citibank" or whatever. What we do is net them all down and say look Goldman at the end of the day you bought 10,000 shares with this price. So this creates incredible efficiencies for the marketplace. The risk part is when you have a Lehman Brothers or you have, we were talking about Knight Capital before, all those trades that had not settled they're in essence, they're creating credit exposure for the street. So instead of them having to go against individual firms we step in, we become the central counterparty. So we liquidate all those trades to make sure the markets keep functioning and minimize any credit losses we've had over 40 failures of firms in our history and never once that we have to tap the rest of Wall Street to make up for those losses. So we're just basically the back office of the back office, so to speak. So it sounds mundane but on a yearly basis we do about 1.8 quadrillion dollars of processing. So we flip the GDP every three days or so. We control 53 trillion dollars worth of securities which are in a vault — most of which are in electronic form. Some are still actually in paper form. But that's what we do amongst other businesses.

Frank No I mean it's incredibly interesting and I knew when I saw you down there in Boca I had to come up to you and shill the podcast because I thought you'd be the perfect guest just because it is this massive Wall Street firm and a lot of what you guys touch can be automated can be improved or replaced by blockchain technology. And I remember it was I think it was you guys had a conference in New York, 2018, your fintech symposium and you're on stage and you said something to the effect of: we want to disrupt ourselves before something else or someone else.

Mike I said if anybody is going to disintermediate us it's gonna be us. And I think that's the way you kind of have to go into it, you know the interesting part you said about blockchain. This company's been around 45 years and it's owned by the industry by the way, we're co-operative in essence that's owned by all the brokers and banks and whatnot that use our services. But when you think about, way back 45 years ago it was all paper based and they would have to stop trading some days you know on Saturdays afternoons and Wednesday afternoon. I think it was.

I mean it was just so much paper that couldn't keep up with it. So when you think about a bold move somebody 45 years ago decided let's take all this paper stick it in a vault and put it all on computers and you know that's it was called "dematerialization" and created massive efficiencies and now the U.S. markets are the most efficient markets in the world because it led the way in that. But think about the risk, can you see going to somebody and saying I'm gonna put it on something called computer tape. People are going to go well what happens if you lose that tape, right?

Frank It's a single point of failure.

Mike We are a single point of failure. But you know it's the old thing you put all your eggs in one basket watch that basket. That's what we do. We watch our basket very closely.

Frank An interesting quote that you had I think it was in WatersTechnology where you say "We are going to disappear" or at least aspects of your business are going to disappear. In terms of being this the words exactly that you used were "a golden copy of trade records."

Mike I mean the way we work today we are the golden copy, we stand as the central database for all record keeping for the cash security markets in the United States. The point I was trying to make with that comment is given the advent of distributed ledger giving the advent of cloud, A.I., everything else the world as we see it today is not going to be the world in five years, ten years, fifteen years. I think it's going to be closer to ten to fifteen because legacy technologies are hard to just completely turn off. But what we do in 15 years, I can't even imagine what it's going to be like because there's so much going on at the same time and it's not just a particular technology to me it is the confluence of all the technologies they're just going to change the financial markets tremendously. So we can sit back and be dinosaurs and get rolled over and become extinct or we can start reimagining what the future looks like and act not only as the person who provides these services whatever they may be in the future but the bridge from today to tomorrow. Again when I throw out those numbers, that's a lot of processing that's going on right now to say we're automatically going to switch to a distributed ledger technology in the next two years. It's not going to happen. But how do you migrate from today to tomorrow? How do you go from paper securities which we still as I said have two trillion dollars worth to tokenized securities and what is a smart contract versus the way the paper contracts work in essence of today? How do you do that whole migration? And that's I think is as critical a role to play in the next five, ten years as reinventing what the future looks like.

We are going to disappear.

Frank When do you think it's going to happen? I mean like we said at the beginning of the conversation you guys touch settlement, clearing, trading. Where is distributed ledger technology, blockchain technology going to have the biggest impact at this firm and how are you guys preparing for it?

Mike The way Wall Street created its post trade infrastructure and post trade just means that once a trade is executed you have the whole process of clearing and settlement. The change of ownership the record keeping has to go on, it's a series of databases. We have a big golden copy but every firm has a database to have a trading database. They have an operations database they have a credit database so you have all these reconciliations that are happening all over the place with the same basic information used for different purposes. And there's no one centralized, agreed upon view of what that data says or what those transactions are what the positions are, etc etc. If you could actually just have one. Just think about the amount of work you could take out and how much you instead of doing replication of work over and over and over again. We just create massive efficiencies. So that's where I kind of see it going, now you know where we have one major project on the way which is called a trade information warehouse which is another product which is a credit default swaps CDS over-the-counter product.

Frank Sounds a lot like from your world Ryan. Banking, Wall Street World?

Ryan Todd This is way over my head, way above my pay grade.

Mike It is it is a product that created a lot of problems in 2008. AIG, for instance, was brought down by their positions and nobody knew what was out there. So we you know we had this database of these contracts and they are contracts versus securities and we were able to give insights to the industry about what the positions were and specifically Lehman Brothers. There was talks about there were going to be 50 billion, 100 billion, 400 billion dollars worth of payments against Lehman OTC and we knew in reality because we had this database it was 6 billion dollars. So we announced that look we've got most of them. We know exactly what's going on. Stop panicking it's only six billion dollars worth of payments. So we have this trade information warehouse. It is a database. And with the DLT becoming more realistic in terms of an application we are now in the process of rewriting the trade information warehouse into distributed ledger using smart contracts using cloud and migrating off a traditional database into DLT and that's actually a very good usage. I think a lot of times when you see new technologies coming out everyone is looking "this a great new technology let's apply it everywhere." Life doesn't work that way right if you force a solution to a question that doesn't have to be answered you're just going to waste your time. This actually was a very aligned need and solution set so we're hoping to launch either later on this year. Hopefully by the end of this year. Right now though a lot of the people who are involved in this are involved with Brexit so their attention is not focused on the conversion. The work has gone very well so far and we hope to you know probably the biggest piece of infrastructure in the financial markets once it gets launched on DLT. A lot is left to be learned. I mean it's a new programming language you know? How do smart contracts work? How does governance work? Everyone talks about DLT, but who controls the nodes, right? Who has the ability, you're not gonna have permissionless systems in the financial markets. We can debate that.

Frank That's a hot take.

Mike I will tell you I just you know in my view somebody thinking that there is no control of who goes in and out of a financial system, what's done in that financial system. I think that's pollyannaish. I think there has to be a central control doesn't mean you're trying to exclude innovation or exclude members but you want to know who's in and who's out. I mean that's just in my in my world common sense.

Frank Templum which is you know security token whose platform they're building their platform on a permissioned network because they're worried about some of these issues of security. You know if this thing forks, what happens?

Mike If you have forks, if you have some sort of error, who is the arbiter and who decides what to do? Who decides what smart contracts go on? And if you modify a smart contract, who is in essence the quality control? All those things are the roles we play right now. It'll change how we do that. But somebody has to play that role in the financial markets.

Frank There's a few players that are kind of trying to move over there Hashgraph is looking to roll out a public blockchain for enterprise use, like Nomura is on their global council and they're trying to build a public block chain that can be used for enterprises. So is Orbs which raised 118 million dollars to do so.

Mike I think there are definitely applications for public blockchain.

Frank In data, just not in finance?

Mike But I think in finance given you know, the old, who is it the the famous bank robber said "Why go to the banks, that's where the money is?". I mean why do you go after the financial system, that's where the money is. So if you don't have safeguards nobody is going to the trust the systems nobody is going to use the system. So you have to be able to know: Who are you working with? As well where are these securities, whatever form they may take? How do I know I'm going to get paid? How do I know there's not fraud involved?

Frank What do you think?

I like Banana Coin better than Dentacoin.

Ryan Yeah