DTCC Operations Ran During Sandy, Vault Status Still Unclear

The Depository Trust & Clearing Corp. processed about $19 trillion in securities trades last week even as Hurricane Sandy submerged its 40-year-old underground Manhattan vault holding physical stock and bond certificates.

The company switched day-to-day command of its operations to its office in Tampa, Florida, and moved control of the technology that runs its clearing and settlement business and record-keeping to its Dallas data center the weekend before the Atlantic’s largest-ever tropical storm, Michael Bodson, president and chief executive officer of New York-based DTCC, said in a telephone interview. The average value of transactions processed weekly this year is $23.1 trillion, DTCC said.

The DTCC handles trades in U.S. equities and government, municipal and corporate bonds and is more important to how markets function than the New York Stock Exchange or Citigroup Inc., according to James Angel, a professor at Georgetown University’s McDonough School of Business in Washington. Of the approximately $35 trillion in securities for which DTCC provides services, the “vast majority” -- a percentage in the “high 90s” -- is in electronic form only, Bodson said.

Disaster Recovery

“Over the weekend we saw flooding would hit lower Manhattan and declared we were going into recovery mode,” Bodson said. “Given our criticality to the U.S. financial system, we have very, very robust disaster-recovery plans that have been built up over the years. We kept operations going. Last week was a normal week. We did not have any significant issues other than the vault. We met all deadlines.”

Regulators including the Securities and Exchange Commission, U.S. Federal Reserve, New York Fed and Department of Financial Services in New York State tracked the DTCC’s emergency plans daily since last weekend, Bodson said. He and other executives have been in touch with them, the Treasury Department and Commodity Futures Trading Commission, he said.

“We can live without the NYSE and we can live without Citigroup, because their competitors will quickly fill the gap,” Angel said by e-mail. “We can’t live without DTCC because there is no substitute. They are one of the most important pieces of our financial infrastructure and the epitome of the ’must not fail’ institution.”

Continual Testing

The DTCC’s emergency plans are “tested continually” and reviewed regularly by regulators and auditors, Bodson said. The company can run its operations from its New York headquarters at 55 Water Street in lower Manhattan or its offices in Tampa. Its three data centers are at 55 Water Street, its Brooklyn, New York, recovery site and in Dallas, he said.

The company occupies eight of the 54 floors at 55 Water Street, according to Bodson. The 10,000-square-foot vault, three levels below ground, contains 1.3 million stock and bond certificates and other securities stacked on shelves like in a library, he said.

The entire 55 Wall Street building remains closed. Over the weekend large yellow pipes emerged from the building’s side entrance, near a crane, and water-pumping machines ringed the premises. The building’s lobby contained other equipment related to the cleanup work. Workers could be seen inside.

While the certificates may be damaged if water flowed into the vault, they’re already recorded electronically in DTCC’s systems, the CEO said. Once the company can assess the status of the certificates, it will figure out what to do about replacing them, he said. DTCC also has images of all bearer stocks and bonds in the vault, he said.

Computer Records

“There’s no loss of economic ownership here,” Bodson said. “It’s a logistical and administrative challenge in assessing if certificates are damaged. We did not lose the computer records of ownerships or the computer records of images.”

About 600 people of the 2,000 at the company’s headquarters in Manhattan are currently working at DTCC’s Brooklyn recovery site, with the remaining operating remotely from home, Bodson said. Bodson, who lives in Connecticut, carpools to the Brooklyn site with three other employees each day. The commute, which starts at 5:30 a.m. New York time, is down to an hour now from 3 1/2 on Oct. 31, he said.

Transactions from the week before the storm continued to be processed on Oct. 29 and Oct. 30 when U.S. stock and bond markets closed or shut early, Bodson said. About 25 people stayed in the company’s Brooklyn location during the storm so they could continue to handle financial trades, with others working remotely, he said.

SEC, Fed

Officials from the SEC, New York Fed and the state’s Financial Services Department remain at its Brooklyn site, which Bodson likened to the prison -- “without the charm” -- portrayed in the 1999 movie “The Green Mile.”

Some DTCC clients had sporadic connectivity to its systems and telecommunications problems because of the damage Sandy caused, he said. The industry’s back offices that handle transactions and record keeping after trades occur and the technology infrastructure operated “very well,” he said.

Water in the underground level that includes the vault should be fully pumped out today, Bodson said. Assessments of whether there are contaminants in the building and whether it’s safe for personnel to return can then begin, along with a study of how to open the vault since no one knows if water lies behind the two-ton door, he said. The vault, built on bedrock, has 18-inch walls of reinforced concrete and has never before been submerged, he said.

Restarted Services

The DTCC restarted some services for clients that could deposit physical certificates to its Brooklyn location on Nov. 1 and expanded the processing of those securities the next day.

The National Securities Clearing Corp., a DTCC subsidiary, cleared $2.35 trillion in securities trades for mutual funds, equities, corporate and municipal bonds the week of Oct. 29, compared to a weekly average of $3.5 trillion this year, DTCC said. The company’s Fixed Income Clearing Corp. cleared $13.45 trillion in government and mortgage-backed securities last week, versus a weekly average of $17.35 trillion, it said.

The DTCC said in 2009 it would relocate about 1,600 employees to offices in Jersey City, New Jersey, in the beginning of next year. The contents of the current vault are going to be moved to a vault in the new location, Bodson said. Temporary office space may be sought for employees for the next few months, he said.

Paper Certificates

The DTCC has been working on a plan to eliminate physical securities in U.S. markets to make processing more efficient and reduce risks. In a July report the company said there were 86 percent fewer certificates in its vault than there were in 2000.

Many companies have stopped issuing paper certificates, according to Bob Kerstein, CEO of Scripophily.com, a company in Fairfax, Virginia, that runs a website selling old stock and bond certificates. It also provides research on them. The damage or loss of certificates in DTCC’s vault won’t affect the value of those bought and sold by collectors since what DTCC holds doesn’t become public when the physical securities are eliminated, he said.

Certificates no longer needed are usually returned to transfer agents or shredded, Bodson said.

A certificate from Pixar, the animation studio that created “Toy Story” and “A Bug’s Life” and was bought by Walt Disney Co. in 2006, sells for $595 on Scripophily.com. DreamWorks Animation SKG, shows Shrek, a green creature in a movie by the same name, on its certificate. It sells for $79.95.

Company certificates portray pieces of American financial history and show how firms’ self-portrayal changes over the years, Angel said. Still, the financial system should press ahead with eliminating physical securities, he said.

“This may be a golden opportunity for DTCC to move to a paperless setup for as many securities as possible,” he said. “Hurricane Sandy may have handed them a fait accompli.”

(Updates starting in seventh paragraph to add details of emergency testing and vault.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE