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by Helen Cunningham

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Keeping Clients in the Loop

DTCC is in the advanced stages of a company-wide evaluation of the “Principles for Financial Market Infrastructures,” which the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published in April.

The 24 principles are designed to strengthen core financial infrastructures and markets by harmonizing and strengthening risk management and related standards for the industry’s infrastructure organizations. “Financial market infrastructures (FMIs) are expected to observe the standards as soon as possible,” stated the CPSS-IOSCO report.

“The principles are all about safety and soundness in global financial markets,” said Michael Bodson, DTCC President and CEO. “They provide common standards against which we can benchmark our policies and practices to ensure our risk management program is comprehensive, integrated and well-managed.”

For all DTCC’s focus on meeting the principles, Bodson added that the principles are not the goal. “The goal is to run the company in a thoughtful, controlled and transparent manner, and if we do that, then we’ll meet the principles and be able to demonstrate to regulators, the financial community and the public that DTCC is rigorous about risk management.”

‘Essential’ role of FMIs

The report’s 24 principles for the operation and governance of FMIs update three sets of existing international standards, recommendations and principles previously issued by CPSS-IOSCO. The new principles cover subjects such as governance, credit and liquidity risk management, settlement, default management, efficiency and transparency.

“These standards are more detailed than prior principles and, in some cases, more nuanced,” said Andrew Leonard, DTCC Managing Director and Head of Operational Risk, who together with Merrie Witkin, DTCC Managing Director and Deputy General Counsel, is overseeing the company’s CPSS-IOSCO self-assessment. “They raise the bar on FMIs in recognition of how important they are to the financial system.”

William Dudley, President and CEO of the Federal Reserve Bank of New York and CPSS Chairman, emphasized this point when the report was released. “Robust and efficient FMIs help to ensure that markets continue to function effectively even in times of crisis,” he said. “They are an essential prerequisite for financial stability.”

All hands on deck

As CPSS-IOSCO was preparing the report over the past two years, DTCC and other infrastructures participated in the process, providing extensive input. This approach helped ensure the report was comprehensive, while averting unintended consequences.

“The 24 principles impact DTCC across all its regulated entities, including the new trade repositories for over-the-counter derivatives,” said Leonard, noting that trade repositories were added as a new category of FMI.

Since May, DTCC has been conducting a rigorous evaluation and gap analysis against each principle. DTCC tackled this undertaking by creating a senior working group, chaired by the company’s Operational Risk department and General Counsel’s Office. This group is ensuring a consistent approach to the evaluations across all DTCC’s regulated subsidiaries. Every principle has been assigned an owner, who put together a team of subject matter experts to evaluate each applicable legal entity against that principle.

Witkin noted that the CPSS-IOSCO assessment methodology and disclosure framework are not yet final, and that the principles need to be integrated into U.S. law. “We want to be proactive and ready to go, so we are preparing drafts and working through a gap-analysis to stay ahead of the curve,” she said. “We will be discussing the analysis with our regulators and developing draft action plans as appropriate.”

DTCC’s Internal Audit department will be conducting an independent analysis of the company’s CPSS-IOSCO process. “Internal Audit will review the methodology and conduct selective testing to ensure its rigor and soundness,” said Robert Peiffer, DTCC Managing Director and General Auditor.

The working group is also keeping DTCC’s Management Risk Committee, which has oversight and governance responsibility for risk, and the Board Risk Committee apprised of its work. @