DTCC took a front seat driving industry debate and conversation on some of the most prominent emerging issues in financial services this year, leading industry-wide discussions on fintech, cyber security and systemic risk.
Embracing the Fintech Revolution
Blockchain emerged as the biggest technology issue in years as financial firms rushed to establish partnerships, create innovation labs and explore opportunities for leveraging distributed ledger technology (DLT) to reduce risks and costs primarily in the post-trade environment. DTCC staked out its position early in 2016 with the release of a white paper, Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape, which attracted global attention and positioned the firm as an expert source of information.
In the paper, DTCC said blockchain represents a generational opportunity to re-imagine the post-trade infrastructure, but also cautioned against the growing hype by explaining the current limitations of the technology and the need for it to integrate into the current system. DTCC also stressed the importance of industry-wide collaboration.
DTCC reinforced its commitment to exploring potential uses of blockchain by making a financial investment in Digital Asset Holdings, LLC, a developer of distributed ledger technology for financial services. Michael Bodson, DTCC President and CEO, was named to the company’s Board of Directors. DTCC also became a premier founding member of the Linux Foundation, a nonprofit organization enabling mass innovation through open source, to support a new venture known as the Hyperledger Project, a collaborative effort to advance the blockchain technology.
In this role, DTCC has played an important role bringing financial industry requirements to the group’s agenda, while taking the lead on multiple workstreams of open source development for the first Hyperledger release. DTCC is active on the Steering Committee, and Rob Palatnick, Managing Director, Chief Technology Architect, serves on the Governing Board.
Importance of Collaboration
Collaboration among financial marketplace participants and regulators is critical to understanding how DLT can be implemented into streamlining the existing financial industry infrastructure. To that end, DTCC hosted two industry events in 2016, which brought together thought leaders from around the globe to discuss the emerging technology.
In March, DTCC hosted an audience of nearly 500 financial industry professionals at the 2016 DTCC Blockchain Symposium in New York. The event featured discussions on the business applications of blockchain and DLT for financial market infrastructures. In November, DTCC and The Centre for the Study of Financial Innovation (CSFI) co-hosted the Disruptive Technologies Forum 2016 in London. Nearly 150 industry thought leaders, technology experts and policymakers met for a half-day of discussions around cloud computing, blockchain and new cyber strategies.
As a valued contributor to the DLT dialogue, DTCC executives were also invited to speak on more than 20 panels at prominent fintech industry events, including the Hyperledger Project opening meeting, the Thomson Reuters Financial Services Symposium, the Euromoney Blockchain Forum and Sibos.
DTCC executives also engaged with regulators, clients and key stakeholders at more than 30 meetings to discuss aligning DLT with the core principles of mitigating risk and enhancing operational and cost efficiencies. In addition, DTCC published more than 30 DLT-related articles, including a dozen executive bylined pieces in leading industry publications, such as Global Custodian, TABB Forum, Institutional Investor and CIO Review.
Advancing Proofs of Concepts
DTCC’s work with Digital Asset Holdings is emblematic of its effort to remake the post-trade process where it makes sense. DTCC partnered with Digital Asset in March to develop and test a distributed ledger-based solution to manage the clearing and settlement of U.S. Treasury, Agency, and Agency Mortgage-Backed repurchase agreement (repo) transactions, a process that is highly manual and would benefit from greater automation.
DTCC was also part of an industry working group that successfully tested blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single name credit default swaps (CDS)— the first initiative of its kind. The repo and smart contract initiatives will continue to advance with more progress expected in 2017.
Systemic Risk: The DNA of DTCC
DTCC is, at its heart, a risk management organization, and in 2016, the firm continued to provide stability and certainty to the marketplace, while providing leadership on issues related to managing and mitigating systemic risk.
DTCC’s Systemic Risk Office (SRO) continued to engage with key stakeholders to facilitate the exchange of ideas to heighten awareness of systemic risk and collaborate on new initiatives designed to reduce potential threats.
Examples of SRO’s stakeholder engagement include quarterly roundtable meetings, events and other outreach activities, including work with its advisory council, with risk managers from across the industry. These efforts brought together more than 200 senior-level risk managers for robust discussion on trends in systemic risk and how firms can strengthen and enhance their capabilities.
Throughout 2016, professionals from DTCC’s SRO also spoke on panels at prominent industry events, including the SIFMA Margin and Credit Annual Conference (Regulatory Panel) and the IOSCO/PIFS – Harvard Law School Panel.
In addition, DTCC continued to publish its bi-annual Systemic Risk Barometer, which identified in the recent November survey that cyber risk remains the No. 1 concern, but geopolitical risks are also top of mind in this global survey of risk managers, operations heads and policymakers.
“Engaging with clients, regulators and our key stakeholders is a critical part of DTCC’s risk management framework,” said Michael Leibrock, Managing Director and Chief Systemic Risk Officer at DTCC. “It provides us with insights into how various risks are impacting firms and how they are responding. It also helps us identify initiatives DTCC can pursue to mitigate existing and new risks facing the industry.”
In 2016, DTCC published a Discussion Paper, Trends and Risks in Bond Market Liquidity¸ which drove member outreach initiatives and contributed to the broader discussion around market liquidity. The paper explores changes in financial markets since the 2008 financial crisis that may have contributed to the growing uncertainty surrounding market liquidity in U.S. Treasury and corporate bond markets.
Raising Awareness of Cyber Security
While all industries face the growing threat of cyber attack, the issue is particularly acute for financial companies. That’s because of the interconnected nature of global markets and the impact a successful cyber attack would have on the broader economy. Stephen Scharf, Managing Director and Chief Security Officer, has been DTCC’s point man on this key industry issue.
As an industry-owned financial market utility, DTCC has called for a collaborative approach among industry stakeholders to help mitigate emerging cyber threats.
In November, Bodson joined financial services executives, financial regulators and officials of the Obama Administration to discuss the growing threat of cyber security and its impact on financial stability. The meeting built upon DTCC’s work with federal officials over the past several years to strengthen the industry’s resilience to prevent or mitigate the impact of an attack.
Further demonstrating its collaborative approach to cybersecurity, DTCC joined the Financial Services Analysis and Resiliency Center (FSARC), a new, not-for-profit organization dedicated to identifying, analyzing, assessing and coordinating activities to mitigate the threats and risks of cyber attacks.
Toward the end of 2016, policymakers began to issue cyber security guidance around best practices and frameworks across jurisdictions. Recognizing the potential for compliance challenges for firms operating in multiple jurisdictions due to non-harmonized guidance, DTCC urged the industry, policymakers and other stakeholders to work toward harmonizing cyber guidance globally.