SAB Grapples with the Challenges of a Difficult Economy

In his introductory remarks for the mid-year Senior Advisory Board meeting for DTCC Insurance & Retirement Services, Donald F. Donahue, DTCC Chairman and CEO, stressed the importance of addressing the longer-term risk issues that the global recession has brought to the forefront. He told the assembled senior executives from carrier, distributor and clearing firms that the focus on risk assessment and risk mitigation carries with it the growing expectation of regulatory change and the need for greater transparency of assets and transactions.

"We are looking at a substantial escalation of regulation across the financial marketplace, and the industry should prepare for that possibility," said Donahue. "Regardless of what occurs at the federal level, insurance regulation at the state level will likely survive in some form. We all need to understand how to manage the new regulatory expectations on a global scale."

Donahue stressed that the new regulatory environment will likely require a leveraging of the financial marketplace's central infrastructure to support efforts to enhance transparency in the marketplace. As an example, he highlighted the role of DTCC's Trade Information Warehouse last year in calming financial markets when rumors spread that potential liabilities on Lehman credit default swaps (CDS) could top $400 billion. DTCC quickly stepped in to dispel this information by publicly releasing data from the Warehouse showing that the actual amount would be less than $6 billion.

The current debate on re-regulation in Washington centers on bringing greater transparency to the OTC derivatives market, possibly by standardizing all contracts. However, major market participants, including insurance companies, have said they still need the flexibility offered by customized contracts to acquire or hedge risk to meet their unique investment strategies. DTCC has been working with policymakers to explain how the Warehouse can help achieve the twin goals of enhancing transparency for regulators and the investing public while also supporting the ability of market participants to utilize customized products.

Donald F. Donahue
DTCC Chairman and CEO

Donahue reinforced this point during a recent speech before the U.S. Chamber of Commerce in Washington, DC, where he also highlighted how the Warehouse has the ability to give regulators a centralized vantage point across asset classes from which to monitor and mitigate risk. Download the full text of Donahue's U.S. Chamber speech.

Doing More with Less

Whether it was introducing new products or expanding usage of core services, "doing more with less" was the recurring theme in each segment of the mid-year gathering. The SAB focused on completing the 2009/2010 commitments to new products imp-lementation in the web services area (Attachments, In-force Transactions Access (IFT) and Replacements) and finding ways to increase usage of existing products.

Adam Bryan, DTCC Managing Director, Insurance & Retirement Services, stressed that DTCC is actively searching for ways to work more efficiently with customers, make product adoption easier, and expand usage of core products "by increasing awareness of our role in the industry and the services we provide."

"We are exploring ways to leverage our existing platform without increasing your costs," Bryan said. "Our desktop applications, IFT and Licensing & Appointments Access (LNA), simplify adoption and usage of our core services with no development costs. Other products will be included on the Access platform as more users take advantage of its potential." "As we identify efficiencies that support volume growth, we need to educate existing clients on our whole family of services and reach out to potential customers, encouraging product adoption by more distributors and accelerating return on investment for development efforts," he added.

New Distribution Solutions

Although the agenda for the June meetings did not feature a large number of new projects, one particular area did receive near unanimous attention from carriers and distributors – distribution and money settlement.

As greater and greater numbers of contracts arrive at the payout stage of their life cycle, SAB participants acknowledged the need to use money settlement services to facilitate contract disbursements (e.g., withdrawals, liquidations and annuitization payments). The process would require the communication of client instructions on returning funds to their brokerage accounts, as well as the storage of brokerage account numbers on all contracts.

Pre-replacement Processing

And with transparency becoming more critical and the Replacements solution in the development pipeline, insurance firms have also expressed interest in exploring ways to improve 1035 exchange transparency through some form of pre-replacement processing. As a non-taxable event (according to the 1035 provision in the tax code), it is important to be able to identify the source of the exchange dollars and to provide relevant data necessary to supervise the transaction. To develop a pre-Replacements solution, data elements must be identified common to the inquiries from distributors to carriers giving up the contract. This would allow access to relevant old-contract information for suitability/supervisory comparison purposes.

Interest Rates

Other new information-exchange areas to be considered include the development of a solution that would allow product manufacturers to post current interest rates for fixed rate offerings, as well as storage of and access to historic rates.

In Summary

Leonard Schmitt, DTCC Group Director, Relationship Management, expressed DTCC's appreciation for the continued high level of participation at the SAB meetings. "It demonstrates the strength of the industry's relationship with DTCC and the vital importance of the work ahead to continue the automation of insurance processing and information exchange," he said.