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  • 'Infrastructure Leaders Gather to Discuss Ways to Strengthen the Global Financial System'

  • Donald F. Donahue, DTCC chairman and CEO, gave the keynote address at the recent General Assembly meeting of the Americas’ Central Securities Depositories Association in Tampa, Florida, hosted by DTCC. An excerpt from Donahue’s remarks follows. Click here (pdf) to read the entire speech.

    Donald F. Donahue

    The true test of the resilience of a market infrastructure is shown in how effectively it supports its members in precisely the most extreme market events. In the moments when the market is verging on crisis, success in ensuring our members that their risks with us are still very well controlled and effectively managed has been and will be absolutely critical to preventing total market panic.

    With the experience of the last two years, we have no higher responsibility than to respond to that challenge of risk. How do we need to think about innovating to dramatically reduce the risks inherent in the operations of our organizations?

    However successful we were in 2008, we need to intensify our focus on meeting that challenge. How can we make our risk models even more resilient? How can we strengthen our financial resources to ensure settlement even in very severe default scenarios? How can we improve our warning systems for setting off an alarm when unusual transactions that create major exposures are in the pipeline? The common wisdom says – correctly – that one of the few systems that consistently worked right in the recent crisis was the clearing and settlement infrastructure. But we must understand that that means, among other things, that the pressures on the infrastructure next time will be even more severe. And we have to prepare for that now.

    Another space demanding innovation, we believe, is the role of the market infrastructures in thinking about and addressing systemic risks. Again, a hallmark of the recent crisis was its systemic nature. Risks that might have been completely tolerable within the confines of one financial institution became far more dangerous when they spread throughout the financial system as a whole. Exposures that seemed manageable in one firm’s portfolio became deadly when it became clear they were buried in many firms’ portfolios, with the potential that horrendous losses would ensue if all of those firms tried to liquidate the positions at the same time.

    So we now see that understanding risk from the perspective of the system as a whole is critical, and who can contribute better to that understanding than the market infrastructures that essentially embody that system? In future, we clearly will need to take on much more of a role in helping to assess the health of the whole system, and in working with market authorities to understand where vulnerabilities are building up and where risks may be lurking that need to be brought under control.

    DTCC recently brought on board a Chief Systemic Risk Officer to take on precisely that task, and it is an area where all of us need to become much more creative in our thinking and more innovative in our planning….

    A third area in which the market infrastructures need to be much more innovative in the coming years is planning and actually practicing for the most extreme events as a way of understanding the new challenges we face. We will have to become much more practiced at stress testing our systems, particularly our risk systems; at scenario planning to identify stress tests we should be trying; at “reverse stress testing” – assuming that we’ve experienced a shock that has caused us to fail, and then working backwards to figure out what vulnerabilities could have produced that result. Expanding those efforts to include our members would make for even more robust exercises. Sharing our scenarios with our members, and asking them to share theirs with us, would also help prepare all of us even more effectively. @