DTCC Connection

Feb 01, 2012 • DTCC Connection

Blog for Employees Reinforces DTCC’s Risk Mindset

by Helen Cunningham


At every level of DTCC, we need to think critically and creatively about risk to ensure we are out front in protecting the industry,” said Michael Bodson, DTCC’s COO. “Within the company, we are driving home the risk management focus by encouraging people to communicate more openly. The goal is to create an environment in which employees feel free to challenge the status quo, ask questions and voice ideas about the ways we identify, monitor and mitigate risk.”


Under a program called DTCC 3.0, DTCC has been steadily raising the bar on risk management and a critical aspect of 3.0 is increasing risk awareness and dialogue among all employees. One vehicle DTCC uses to achieve this objective is a blog for employees, launched in May 2011.


To date, the primary author of the blog has been Donald F. Donahue, DTCC president and CEO, who has written close to 100 postings. “One benefit of this blog for me is the opportunity to memorialize some stories about DTCC – stories that have key lessons about DTCC’s history, or stories that just fill in some important context about past decisions that could be relevant to issues we might face again in the future,” Donahue wrote in a recent posting.


In 2011, the blog included a series titled “The Seven Habits of Highly Effective Infrastructures” in which Donahue spelled out the criteria for a successful infrastructure organization, using many real-life examples from DTCC. The blog also covers leadership and diversity topics, drawing on events in the news, books and other points of reference.


Here is a sampling from DTCC’s 3.0 blog.


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Risk

At DTCC today, making the choice to lose sight of risk is not an option. When we decide to accept a residual risk or tolerate a certain level of risk, we have to remember it’s never a decision that’s set in stone. Accepting a particular residual risk comes with the responsibility that, over time, we will keep going back to it and questioning whether it’s still something we should accept.


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We need to pay close attention to what happens in the extreme places, what happens in the “tail” of the risk curve, when our resilience and our ability to continue to deliver stable, safe and sound services, including risk mitigation, will become absolutely critical to the health and safety of our members and the financial system as a whole.


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All our thinking about risk has to factor in the reality that “the better we get at risk mitigation, the more risks people will take.” Risk is dynamic and ever-increasing and, to stay ahead of it, we have to run at least twice as fast.


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An economist named Hyman Minsky spent his career thinking about financial crises – how they arose and why they frequently seemed to increase in ferocity. He developed a theory based on the fundamental insight that financial systems are inherently unstable. They naturally trend towards crisis in a cycle that repeats over time as the effects of prior crises fade from people’s memories. Understanding this idea is what I call Habit No. 4 of highly effective infrastructures.


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In part our role involves providing information to regulators to strengthen their ability to oversee financial system risk. The “regulatory portal” our OTC derivatives team makes available to more than 30 regulators around the globe illustrates this perfectly.


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Highly effective infrastructures are always forward-looking and always scanning the landscape to see what’s new, what’s developing and how that will translate into new forms of risk.


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Like someone crossing Water Street, our approach to risk management has to look both ways. Our “headlights” perspective tries to spot risks on the horizon before they become urgent. Our “backstop” role strives to make our own systems and processes ever more risk-resilient so they will hold up even when we’re dealing with the unexpected.


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Although Operational Risk Management (ORM) is a relatively new discipline that grew out of the Basel II “bank capital adequacy” standards developed around the turn of the century, I’ve always thought that DTCC has been in the business of identifying and controlling operational risks since its inception 40-plus years ago.


Leadership/Diversity

Some of you know that I admire Winston Churchill a lot… As with Churchill, we’re all a mixture of strengths and weaknesses. Sometimes a weakness can become a strength, depending on the situation. Oftentimes a strength can become a weakness, when we become over-reliant on it.


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If I were Tim Cook, I’d be very focused now on the leadership team I’d be relying on to carry Apple forward. I’d be assessing that team for its strengths in innovation and creativity, and also in the collaboration and motivational qualities that are critical to Apple’s future without its phenomenal “imperial CEO.”


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I am particularly struck by the sea change represented by how [my daughter] Lily and her peers “think about” the issues and concerns we label “diversity and inclusion.” I put “think about” in quotes because the striking thing is that they don’t seem to think about it at all. Diversity is in the air they breathe.


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Many of our most interesting ideas come from what at first seem far-fetched associations, “out-of-left-field” comments that occur to us. So pay attention to those random ideas that occasionally pop into your head – sometimes they’re gold!


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Columnist David Brooks had an interesting article in today’s New York Times about the work of Daniel Kahneman, a Nobel Prize-winning economist now at Princeton University. Kahneman is an advocate of the idea of “adversarial collaboration” — when studying something, work with people you disagree with, so that your interactions tend to offset whatever biases might be at play.


DTCC

DTCC 3.0 will involve incredible change for our company. We have to rethink much of what we do, and really consider deeply how we can improve our ability to control and, where possible, eliminate risk in all of the services we provide.


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I want to send a resounding kudos to our Asset Servicing team. Their hard work in upgrading DTC’s principal and income (P&I) processing has paid off spectacularly.


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We have just received exciting news. A global group of trade associations and financial services firms coordinated by the Securities Industry and Financial Markets Association in the U.S. has recommended DTCC’s consortium to provide a global system for the creation and maintenance of “legal entity identifiers.”


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For the first decade of the 21st century I think we all realized we were part of a “new” DTCC – in one sense very literally, since the merged organization was legally formed in the waning weeks of 1999. And it felt very “new.” Now it feels to me that over the last year we came of age. @


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