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Embracing Innovation to Maximize Value an Overview

By Melanie Best | April 10, 2018


DTCC’s 2018 Fintech Symposium featured a rich line-up of presentations and panel discussions tackling the challenges of harnessing technologies like digital ledger (DLT) and artificial intelligence (AI) to maximize value to clients and the markets overall. The annual event, which also addressed cyber threats to the financial sector, has become a signature forum for sharing ideas and experiences to help firms navigate fast-moving developments in fintech, and this year’s program did not disappoint.

Views From the Top

DTCC President and CEO Mike Bodson and Chris Concannon, Cboe Global Markets President and COO, provided C-suite perspectives on fintech’s challenges and opportunities. In his opening remarks, Bodson defined the perpetual question around technology in financial services: how to balance risk and innovation. DTCC’s inaugural fintech forum, in 2016, was devoted entirely to blockchain, Bodson noted. Three years later, innovation is also coming from AI and machine learning but technology’s role—to eliminate the frictions and pain points in the chain of financial transactions—remains the same.

“The financial markets have always evolved using technology of different sorts, from the first time somebody traded ahead of the market by using a telephone,” Concannon said.

Bodson and Concannon concurred in predicting that new technologies will not cause incumbent players—broker-dealers, custodians, central securities depositories, for instance—to disappear, because they will fight to find ways to stay relevant. And Concannon added another reason—the regulatory status these players hold as registered, certified entities.

Bodson also spoke about the urgency of attracting sufficient and diverse talent to technology roles in financial services, to ensure the industry is competitive in meeting future challenges.

READ: Closing the Cybersecurity Employment Gap Through Diversity

From Experimentation to Implementation

The 2018 Symposium took deep dives into DLT, AI and machine learning, with four sessions drilling down into use cases and future prospects for these technologies to transform financial services.

Panelists in a morning session agreed DLT’s early hype has met today’s reality: prognosticators had previously overstated its ability to disrupt the trading markets and infrastructure, but useful DLT applications will be rolled out over the next few years. Blythe Masters, CEO of Digital Asset, which provides DLT solutions to financial institutions, was even more bullish, telling DTCC CTO Robert Garrison she foresees “a huge wave of innovation” from DLT and other technologies that “will happen more quickly than people think. Read more on the symposium’s DLT sessions.

McKinsey & Company presented use cases for AI in the capital markets. Associate Partner Fuad Faridi said AI, over-promoted in the past, can now deliver tangible benefits thanks to staggering advances in hardware and computational power and the explosion in the amount and breadth of available data. While trading desks already use AI and machine learning, Senior Advisor Jeff Kenney said, there are untapped opportunities in research, sales, relationship management, and middle- and back-office applications—any functions that pull in immense volumes of data from myriad sources and need to turn it into targeted, actionable information for clients. Nevertheless, large financial institutions still struggle to capture full value from analytics due to the siloed manner they apply it.

Ann Bergin, DTCC Managing Director and head of Wealth Management Services, spoke with David Kingland about his firm’s rebuild of a key mutual funds database for DTCC using machine learning. Bergin has seen the database, which contains 27,000 securities with five million data points, get “smarter” over time as it clarifies initial misinterpretations of terms.

Bumping Into Regulation

Brett Redfearn, Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission (SEC), added a regulatory point of view to the day’s assessments of fintech’s potential. In a conversation with DTCC Managing Director and Head of Global Public Policy Mark Wetjen, Redfearn acknowledged SEC concerns about fraud, theft, and terrorist financing in the surging market for cryptocurrencies. They look like securities, he said, but none are currently registered or trading on registered exchanges. The SEC has signaled its intent to extend oversight to these products.

Regarding AI and machine learning, while these technologies could enable bad actors to build trading systems that learn to evade regulatory rulebooks, Redfearn said they can eventually enhance surveillance of regulators’ databases.

Cybersecurity in the Digital Age

The cybersecurity aspect of fintech received extensive attention. Audience polls showed 50% of attendees believe a significant cyber incident impacting the financial sector will occur in the next year, and more than 75% think fintech will intensify rather than ease the cyber challenge.

Speakers agreed the financial markets’ interconnectedness makes them especially vulnerable to cyberattacks and boosts the need for collaborative solutions and responses, through entities like the Financial Services Information Sharing and Analysis Center (FS-ISAC).

As Chris Concannon put it, “Our financial markets . . . [are] one big network, from exchanges to clearing houses, to the members, to their clients. And it all starts online. So, it’s a lot of risk—and the weakest link on that network can damage the entire thing.”

Panelists in the afternoon discussed the individual and collective responsibility to build resilient cyber defenses. A DTCC white paper distributed at the event complemented the discussion by raising a series of questions about preparedness. Panelists, from the Financial Systemic Analysis and Resilience Center (FSARC), Oliver Wyman and SWIFT, agreed that best-laid recovery plans can fall short in a real situation because, unlike natural disasters, cyberattack impacts are unpredictable. DTCC Chief Security Officer Stephen Sharf’s advice: “It’s not good enough to write the plans; you have to test them, test them, test them.”