In the wake of the global financial crisis, supervisory authorities and the industry have sharpened their focus on the critical role of financial market infrastructures (FMIs) in protecting market safety and soundness. In this interview, Andrew Gray, Managing Director and Group Chief Risk Officer at DTCC, discusses new issues confronting FMIs, the importance of regulatory engagement and what differentiates DTCC from other infrastructure organizations.
What are the key themes policymakers are debating globally regarding FMIs and their role in mitigating risk?
FMIs historically have been the front line for monitoring, managing and mitigating risk in all its forms. But new financial regulations have placed added responsibilities on them to protect the stability of the marketplace and the integrity of the financial system. As the role of infrastructures has become more prominent, policymakers have begun to raise questions about FMIs' ability to effectively manage risk, especially as clearinghouses take on new products and as markets respond to a shifting regulatory environment. This increased scrutiny has prompted industry discussion on issues ranging from transparency and good governance to the financial resources and recovery and resolution planning of central counterparties (CCP).
How important is regulatory and client engagement in sharing information and promoting understanding of these issues?
Given DTCC’s unique structure and position at the center of the industry, it’s essential that we work closely with our supervisors and clients to promote discussion on these issues. As a user-owned and governed FMI, DTCC has a unique perspective on the value and expertise our clients contribute to our risk management framework. We’re strong proponents of making our operations transparent and understandable. We offer clients a wide range of educational resources to increase their knowledge of the organization’s risk management and mitigation activities. We also involve them in the early stages of new risk developments and controls to promote dialogue and collaboration.
We think the industry is focused on the right issues. However, FMIs and their supervisors must continue the dialogue to avoid the perception that all market infrastructures operate in essentially the same way. It is also important to avoid the urge to implement overly prescriptive requirements that could cause unintended consequences.
Can you elaborate on your remark that the DTCC model is unique among FMIs?
DTCC’s ownership and governance structures form the foundation of our ability to safeguard the industry. They align directly with our primary mission to protect and mitigate risk for our users. We are a utility that is owned and governed by users of our clearing agency subsidiaries, and these firms are required to commit capital as owners. In return, they benefit from the safeguards, efficiencies and risk mitigation that the organization provides. DTCC’s more than 300 user-shareholders come from a broad spectrum of the industry, and the diversity of our membership helps to ensure that a wide range of industry practices, perspectives and issues are represented.
What role does DTCC’s Board of Directors play in aligning the organization with the needs of the industry?
The DTCC Board plays an integral role in the oversight of the firm, ensuring our services align with the evolving needs of our clients while promoting safety and security across the global financial system. The majority of our Directors represent users of our clearing agencies, and they’re selected to reflect diverse market categories and to provide wide-ranging expertise across financial and operational risk management, product knowledge, clearing and settlement operations and other critical functions. We also have independent directors as well as directors who represent our preferred shareholders. Our Board is committed to vigilant risk management and regulatory compliance, recognizing the scope of DTCC’s centrality to the financial markets and to our clients worldwide.
Against the backdrop of heightened regulatory and capital requirements for Systemically Important Financial Market Utilities (SIFMU), how is the DTCC model evolving?
An ongoing priority for our organization is to continue strengthening our core SIFMU businesses. DTCC’s Board and shareholders recently approved updates to our shareholder agreement to allow DTCC to raise capital by selling new shares to its existing common shareholders. At the same time, a $400 million increase in equity capital was also approved to address the regulatory and economic capital requirements of our three SIFMUs – National Securities Clearing Corporation (NSCC), Fixed Income Clearing Corporation (FICC) and The Depository Trust Company (DTC). DTCC also plans to raise additional capital from the institutional markets to support our other corporate business lines. These developments, together with forward planning for capital replenishment tools, establish a more flexible framework in which the organization can continue to meet its capital needs in the future.
What steps are you taking to enhance the resiliency of the SIFMU businesses?
We’re deeply immersed in enhancing our default management framework, expanding our liquidity resources and developing detailed recovery and resolution plans. These initiatives are a key component of our efforts to enhance the resiliency of our SIFMU businesses and protect orderly and stable markets during times of crisis. Our view is that the continued operation of these services in all circumstances should be the priority, and that the best way to achieve this is through the development of a diverse set of tools based on rules developed and applied within a transparent framework. At the same time, we think it is essential that the framework provide flexibility in the use of these tools in order to account for potential events that could create market stress.