Although financial market infrastructures (FMIs) come in different shapes and sizes and have varying incentives, competing priorities, and business objectives, all share a common goal – to monitor, manage, and mitigate risk to protect the stability of the marketplace and the integrity of the financial system.
Michael Bodson, DTCC President and CEO, highlighted the issue of trust during his keynote speech at the DTCC Client Forum 2015. In the second of a three-part series, Bodson discusses the role DTCC and other critical FMIs play in reducing systemic risk and restoring confidence in the global financial markets.
Part II: The Role of Financial Market Infrastructures in Rebuilding Trust
While the industry as a whole has a responsibility to help rebuild trust, I believe that financial market infrastructures, or FMIs, have a particularly important role to play in this effort.
At the most basic level, I believe responsible risk management with appropriate regulatory oversight is the key building block to winning back the public trust. Therefore, arguments around how FMIs structure their financial resources or interact with the public will be meaningless if markets are not stable and resilient and if the public lacks confidence in the services we offer.
Among the many FMIs serving the industry, DTCC plays a unique role. We are user owned and governed. Our Board of Directors and our shareholders are also our clients. The funds that back our clearing activities and our ongoing operations come from this same group -- and this group is depending on us to provide a variety of services that are critical to their core business activities. Without our clients, DTCC cannot operate. And without DTCC, our clients cannot serve their own clients.
This relationship ensures that our interests and objectives are completely aligned with our clients, who are also the firms whose capital and core business is on the line at DTCC. It also ensures that our primary focus is on addressing industry needs and protecting market stability, especially during the critical time of a crisis.
In addition, DTCC has very strong governance around our risk management practices. We believe in active, ongoing dialogue with our owners and clients around our risk management structures and policies. We are also highly regulated by multiple regulators and in multiple jurisdictions.
Global financial regulators must have real transparency into the risk management practices of all FMIs, particularly systemically important FMUs like DTCC and other CCPs. That said, we caution against an overheated public debate about CCPs as being too-big-to-fail. Financial regulators have been rightly focused on the value of clearing in reducing risk, and they are also right to ensure that CCPs take on this increased activity with proper risk management and adequate financial resources.
Regulators and legislators, however, cannot adopt a one-size-fits-all approach to CCP oversight, and overly prescriptive requirements could easily have unintended consequences on market structure. Instead, regulators and CCPs need flexible tools for addressing the myriad of risk management issues that CCPs face in today’s evolving markets.
Transparency and thoughtful, coordinated, regulatory oversight are the keys for ensuring that DTCC and other critical FMIs are able to play the right role in reducing systemic risk and restoring confidence in the global financial markets.
Trust: The Currency of Business, Part I: The Trust Deficit
The Path Forward: Perspectives from DTCC Client Forum 2015