With a backdrop of innovations like robo-advisors, crowdfunding and blockchain, the U.S. Securities and Exchange Commission (SEC) recently hosted its first Fintech Forum to discuss the potential impact disruptive technologies will have on financial services.
DTCC’s Mark Wetjen, Managing Director and Head of Global Public Policy, spoke on one of the four panels at the November 14 event in Washington, D.C. Wetjen participated in the session, “Impact of Recent Innovation on Trading, Settlement, and Clearance Activities.”
The day’s broad focus was on advisory services, clearance and settlement, capital formation and investor protection. The event was an acknowledgement that new technologies are changing the face of financial services. It also highlights that the SEC does not want to create rules that hinder advances in technology. At the same time, the chief U.S. securities regulator also wants to ensure that its rules keep pace with these advances, while investor protection remains paramount with any new technological developments.
In her opening remarks, SEC Chair Mary Jo White highlighted technology’s importance in finance and the capital markets. “Fintech is well on its way to playing an important role in the future of the securities industry,” White said.
White went on to acknowledge the SEC’s role in fostering an environment of growth for emerging fintech companies. “We, as regulators, also have an important responsibility — to evaluate how our existing rules address both the challenges and opportunities presented by these new technologies.”
Clearance and Settlement
The clearance and settlement panel was moderated by Valerie Szczepanik. Szczepanik is the Head of the SEC Distributed Ledger Working Group and an Assistant Director with the SEC Division of Enforcement. Besides DTCC’s Wetjen, other panel participants included Brad Peterson, Executive Vice President and CIO/CTO at Nasdaq; Chris Church, Chief Business Development Officer, Digital Asset Holdings; Professor Emin Gun Sirer, Cornell University; and Grainne McNamara, Principal in the Capital Markets Team at PricewaterhouseCoopers.
Panelists discussed ways Distributed Ledger Technology (DLT) networks may impact clearing and settlement activities, highlighting the potential for reduction in costs and upgrades to cloud-based systems.
In his remarks, Wetjen highlighted DTCC’s efforts regarding the potential application of DLT to its Trade Information Warehouse (TIW) service. The Warehouse provides lifecycle event processing services for approximately 98% of all credit derivative transactions in the global marketplace.
As Wetjen noted, the credit default swaps (CDS) market has changed significantly, partly due to an increase in clearing, increased capital requirements and other regulatory mandates. “DTCC took a look at its current services and it made sense to explore if DLT could improve upon the technology and processing currently being used,” Wetjen explained. “DTCC is undergoing a rigorous cost-benefit analysis to gauge the possibility of taking next steps towards re-platforming the Warehouse.”
Earlier this year, DTCC successfully tested the use of blockchain technology and smart contracts to manage post-trade lifecycle events for standard North American single name CDS. As Wetjen explained, this proof of concept is one of many steps that DTCC has taken toward evaluating the potential use of DLT to reduce costs and increase efficiencies in the post-trade process.
Panelists agreed that DLT will continue to be a favored solution to streamline many functions in finance. Digital Asset Holdings’ Church pointed to the decline in brick and mortar banks in favor of online banking as one example of how technology is evolving the financial services world. Regarding clearing services, Church also emphasized that custodians will still exist, but they may migrate more toward asset servicing.
Wetjen agreed that while we may see changes to existing regulations, the investor protection and market integrity principles that underline them will stand the test of time. He further explained, “The SEC, CFTC, Federal Reserve and others will not overnight decide that risk management is no longer important.”