DTCC Connection

Aug 26, 2016 • DTCC Connection

DTCC’s Wetjen Discusses Dodd-Frank and Disruptive Fintech

By: Katharine Paisley

Mark WetjenMark Wetjen, DTCC Managing Director and Head of Global Public Policy, recently sat down with DTCC Connection to discuss the 6th Anniversary of the passage of the Dodd-Frank Act in the U.S.

During the interview, Wetjen also spoke about the growing interest among financial firms in distributed ledger technology (DLT) and how regulators are reacting to the coming fintech revolution. Wetjen is a former CFTC Commissioner and has first-hand experience in developing financial regulations. While at the CFTC, he was a proponent of improving market structure and making the global derivatives markets more efficient through the harmonization of regulations around the world.

Connection: Since the passage of Dodd-Frank, U.S. regulators have finalized more than 250 rules, including many that impact DTCC. In the years ahead, more rules will continue to be finalized and perhaps some legislative modifications will occur. What regulations will affect clearinghouses as a whole and DTCC in particular?

Wetjen: One key area under regulatory review is establishing a framework, or roadmap, for resolving clearinghouse insolvency. This is a global effort being undertaken by multiple regulators, and it gets to the root of one of DTCC’s guiding principles: To reduce risk in the industry, and in particular, reducing systemic risk. Regulators worldwide are continuing this discussion that will lead to a more formal approach. DTCC has been part of those discussions and will remain involved, working collaboratively with lawmakers, regulators and other industry partners in the U.S., Europe and Asia to help shape global legislative and regulatory policies on these critical issues.

Connection: What other laws or regulations do you anticipate in 2017 that would impact market infrastructures like DTCC?

Wetjen: We anticipate more regulatory action related to enhancing cybersecurity at firms such as DTCC and others. Recently, Congress passed the Cybersecurity Information Sharing Act of 2015, and DTCC testified at oversight hearings conducted by the U.S. Congress related to implementation of the law. We expect more congressional oversight as implementation continues. Technology will continue to be a focus for DTCC, particularly our blockchain strategy. We will continue to engage and collaborate with the regulatory and legislative community to keep them apprised of trends and relevant developments in DLT, including specific projects being developed by DTCC.

Connection: How will a Trump or Clinton administration affect or change these priorities?

Wetjen: The party conventions revealed some similar financial services themes in the party platforms. If Republicans control both chambers and Donald Trump is elected, one would expect an active legislative agenda. House Financial Services Committee Chairman Rep. Jeb Hensarling (R-Texas) introduced the Financial CHOICE Act, and it would likely serve as a guide for the types of things a Trump Administration might want to act on. However, if Hillary Clinton is elected, her agenda suggests more work on the so-called “shadow banking” sector, or the role of nonbanks who serve as sources of funding for various financial services, including those found in the wholesale markets. Such an agenda could directly impact DTCC, and we could see more policy efforts to have clearinghouses serve as credit intermediaries for more types of transactions.

Connection: Can you describe the evolution of DTCC in response to the new rules coming out of Dodd-Frank? How do you see the industry and DTCC continuing to change?

Wetjen: I have been at DTCC only a short while, but the most notable issue I’ve seen is how cost pressures on DTCC’s clients have incentivized and accelerated the industry’s need to investigate new technology to bring more efficiencies to existing services. Whether it is moving data storage or computing functionality to the cloud, or leveraging DLT, these technologies are being considered in a way they weren’t even a year ago. The change has been remarkable. What’s also interesting about the fintech discussion is that it has brought attention to DTCC’s primary mission – clearance and settlement – in a way we haven’t seen before. DTCC became a much more visible and better-known entity to many policymakers after the financial crisis, but the recent developments in fintech have brought greater attention to DTCC as well, and more interest in the services we provide.

Connection: The elevated interest in fintech companies and what their technologies promise raise new issues for regulators and lawmakers. What is the prevailing view among regulators on the fintech phenomenon?

Wetjen: Lawmakers and regulators globally are examining fintech more thoughtfully than they ever have before. For example, The Office of the Comptroller of the Currency (OCC) recently published a white paper calling for “responsible innovation” in the banking sector. The Bank of England also produced a paper, promoting the possibility of digital fiat currency, and the European Securities and Markets Authority released a discussion paper concerning the impact of DLT on the securities markets. Nearly every financial-market supervisor in the U.S. has a multi-disciplinary working group or team assembled to analyze fintech trends and innovations, including the Federal Reserve Board of Governors and the Commodity Futures Trading Commission. And the list of examples goes on. More recently, Sen. Sherrod Brown (D-Ohio) and Sen. Jeff Merkley (D-Ore.) revealed their interest in fintech and sent a letter to regulators, asking for guidance on fintech. Collaboration with the industry, regulators and lawmakers around fintech and blockchain strategies will be important to any future re-architecting of the post-trade environment.

Connection: In light of these various signals from policymakers, what is the prevailing view they have about technologies such as DLT?

Wetjen: Like all of us, they see the benefits, and they see the risks – they want to cultivate the former, but manage the latter. I think that is generally true around the world. DLT could have a significant economic impact. But regulators will need to balance their policy responsibilities and desires for job-creating or efficiency-enhancing innovation with their duty to enforce the rules currently in place. Governor Brainard from the Federal Reserve perhaps represented this best in a recent speech about DLT: “As policymakers, we want to facilitate innovation where it has the potential to yield public benefit, while ensuring that risks are thoroughly understood and managed.”

Connection: What steps has DTCC taken toward the development of blockchain technology and how does it fit into DTCC’s overall strategy?

Wetjen: As new financial technologies emerge, DTCC is reinforcing its role as a leader in fintech. It started with our white paper on blockchain earlier this year, and we’ve been engaging the industry, technology providers, regulators and policymakers ever since. It continued with our Blockchain Symposium in New York. In June DTCC hosted a panel discussion for regulatory and Congressional staff in Washington, D.C. We’ve also made significant progress on several industry proofs of concept, including initiatives related to repurchase agreements and credit default swaps.

The recently established Office of FinTech Strategy is another example of the company's commitment to leverage new technology to deliver the most efficient and cost-effective solutions to its clients. It signals to regulators DTCC’s commitment to be on the cutting edge of understanding those new technologies and tools, but from the perspective of a firm that takes its regulatory responsibilities very seriously.

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