by Helen Cunningham
Risk, regulation and data were the dominant topics at DTCC’s Executive Forum, a day-long conference attended by 120 industry executives. This was the third year DTCC has sponsored the forum, whose 2010 theme was “DTCC Leadership: Collaborate, Innovate and Execute.” “We’re entering a period of transformational change, a metamorphosis in the regulation and oversight of financial systems that hasn’t been seen or experienced in almost 75 years,” said Donald F. Donahue, DTCC chairman and CEO, in his opening address. He also spoke about “the new world of risk mitigation” and the need “to work with our regulators as partners to improve our risk management operations.” (See page 13 for more excerpts from Donahue’s speech, “Collaboration, Innovation and Leadership.”)
Snapshot of the agenda
“We organize this annual forum to give customers and DTCC’s senior management team the opportunity to discuss major issues impacting the industry, to share ideas about how to address challenges and opportunities, and to give customers insight into DTCC’s strategic direction,” said Paula Arthus, DTCC managing director, Relationship Management. “The event also provides a venue for attendees to meet and network with counterparts and other leading authorities in the industry.”
Congressman Scott Murphy (D-NY)
The forum’s four panels brought together a wide spectrum of industry executives Executive Forum Continued from cover and experts who covered extensive ground. They gave their insights on topics including how financial reform legislation will impact the industry; the heightened role of risk management in the new environment; changes in market structure; and how DTCC partners with other organizations to serve customers.
Also on the agenda were three speakers. Congressman Scott Murphy of New York described U.S. capital markets as “one of our strongest national assets.” He shed light on the legislative process for financial reform and underscored the need for the U.S. to remain competitive on a global level. Gillian Tett, U.S. managing editor for the Financial Times, gave a journalist’s perspective, sharing her insights into factors that influence how the press covers the securities markets. She noted that just a few years ago, mainstream media outlets focused almost exclusively on the equities markets, contributing to a widespread gap in knowledge and understanding about certain other aspects of the industry, particularly derivatives.
The day closed with John Lipsky, first deputy managing director of the Interna- “properly calibrated.” And on the “Evolution and Impact of Market Structure” panel, one speaker expressed concern about the aftermath of regulatory reform and the risk of “unintended consequences.” Larry Thompson, DTCC managing director and general counsel, moderated “Shaping Legislation, Implementing Reform.” He noted that less than two months after the U.S. Congress passed the Dodd-Frank Act, the regulatory debate in Europe has shifted into high gear with the European Commission’s release of its draft text of the European Market Infrastructure Regulation. “Both bills will have a profound impact on every financial firm, marketplace and infrastructure organization operating today and in the future,” Thompson said. “We’re looking at a fundamental change in the ways we conduct business.” He also noted that, in the U.S., the rulemaking process is moving quickly. In Europe, according to a speaker from a European-based institution, rulemaking is likely to extend for another one-tothree years. tional Monetary Fund, whose topic was “The Global Economy and Financial Markets: Where Next?” Lipsky said it is not surprising the post-crisis economic recovery is slow, because an economic downturn is more damaging when it is combined with a financial crisis. He added that although the crisis is being met by an unprecedented global response, “the process of financial sector repair is unfinished.”
Views of reform
Regulatory reform was foremost on the minds of everyone at the forum. In the panel “Innovation Through Collaboration,” one speaker said the reform signals the industry’s process of rebuilding trust with regulators and the public. In his view, while working closely with regulators may slow down certain initiatives, the collaboration will ultimately improve the end-results. Another panelist noted that it is important to ensure the new regulations are “properly calibrated.” And on the “Evolution and Impact of Market Structure” panel, one speaker expressed concern about the aftermath of regulatory reform and the risk of “unintended consequences.”
Larry Thompson, DTCC managing director and general counsel, moderated “Shaping Legislation, Implementing Reform.” He noted that less than two months after the U.S. Congress passed the Dodd-Frank Act, the regulatory debate in Europe has shifted into high gear with the European Commission’s release of its draft text of the European Market Infrastructure Regulation. “Both bills will have a profound impact on every financial firm, marketplace and infrastructure organization operating today and in the future,” Thompson said. “We’re looking at a fundamental change in the ways we conduct business.”
He also noted that, in the U.S., the rulemaking process is moving quickly. In Europe, according to a speaker from a European-based institution, rulemaking is likely to extend for another one-to three years.
Mining the data
Market data was also a recurring theme. In the panel “Taking the Lead on Risk Mitigation,” one speaker summed it up this way: “If you want to deal with market risk, you need the data.”
The discussions included the new Office of Financial Research (OFR), created by the Dodd-Frank Act. The OFR’s mandate will be “to collect and standardize data from financial services companies, to perform research and to develop risk measurement and monitoring tools,” said Donahue.
One of the panelists expressed the view that it is “in the best interest of the industry to be sure the OFR succeeds.” And in terms of DTCC, Donahue commented, “We are quite clear that we have a role to play in aggregating data for the new OFR in ways that would take the burdens and costs off you as individual companies.”
To illustrate how stress in one part of the system can propagate through the rest of the system, a panelist recalled a surprising correlation between the prices of silver and cattle in the 1970s. The reason for this unlikely occurrence was the Hunt brothers, who had large positions in both commodities. When the Hunts tried unsuccessfully to corner the market in silver and the price collapsed, they started selling cattle to raise capital. The result was a price plunge in both markets. With access to data, regulators will be better equipped to identify such patterns and thus mitigate systemic risk.
Nan Noonan, DTCC’s chief systemic risk officer, participated in the panel on risk mitigation, outlining how DTCC is transforming its approach to systemic risk.
The company is currently conducting a thorough analysis to break systemic risk into intellectually manageable topics to see how they relate and how they can be most effectively managed or mitigated. In the words of another speaker, it is essential to define systemic risk in “actionable terms.” Several other panelists discussed the growth of central counterparties and their role in mitigating risk. One noted that CCPs are not “panaceas” but rather mechanisms that shift risk. As a result, in the new environment, some firms are “cataloguing” their membership in CCPs globally to measure their risks more comprehensively.
“No two clearing arrangements or entities are the same,” said one panelist whose firm has launched an initiative to catalogue all its clearing arrangements, adding that the financial standing of a CCP is the first of many considerations. This person anticipates “a flight to quality” in CCPs. @
“Evolution and Impact of Market Structure” (from left): Thomas Callahan, CEO, NYSE Liffe U.S.; Andrew Simpson, EuroCCP head of Product Management; Stephen Wolff,managing director and head of Strategic Investments, Deutsche Bank; Gregory Tusar, managing director, Electronic Trading, Goldman Sachs; Christopher Concannon,partner and EVP, Virtu Financial LLC; and moderator Robert Hegarty, DTCC managing director, Strategy and Marketing.
Photography By Terise Slotkin