DTCC Connection

What are the potential market impacts of disruptive innovation, and how should regulators respond? These questions were raised during the “Disruptive Innovation in Post-Trade and Its Impact on Regulatory & Policy Objectives” panel at the Disruptive Technologies Forum 2016 in London.

The event, co-hosted by The Depository Trust & Clearing Corporation (DTCC) and The Centre for the Study of Financial Innovation (CSFI), brought together nearly 150 industry thought leaders, technology experts and policy makers for a half-day of discussions around cloud computing, blockchain and new cyber strategies. Panelists discussed the impact of disruptive technologies on regulatory and policy objectives and discussed collaborative innovations that are helping to move blockchain out from proof-of-concept into production systems.

Andrew Douglas, DTCC Managing Director, Government Relations & CEO of DTCC’s European Trade Repository, served as panel moderator. Panelists were David Bailey, Director, Financial Markets Infrastructure Supervision, Bank of England, Dirk Schrade, Deputy Head of the Payments & Settlement Systems, Deutsche Bundesbank, and David Lawton, Managing Director and Co-Head of Financial Industry Regulatory Services, Alvarez & Marsal.

Crystal Ball Gazing

Schrade acknowledged the potential benefits of disruptive innovation - reduced cost, better security, reduced counterparty risk, faster settlement and increased transparency.

"It should be quite clear that there are a lot of open issues whether the evolution will go in a direction where we have a better situation compared to today,” said Schrade.

Bailey added his view on two ways in which markets can change: reducing costs and through competition and innovation of new market entrants. “We’ve heard about the possible benefits of distributed ledger type technologies taking existing processes and taking costs out,” he said. “That typically pushes you towards a cooperative model.”

Impact of Regulation

Douglas noted that regulation has effectively pushed activity into what we generally call the shadow banking area, making it challenging for regulators to manage the economy for which they are responsible.

“It’s the task of the regulator, as I see it, to monitor developments, to understand, to see what could be potential risks, and to see whether there is the need to adjust the current regulatory framework,” noted Schrade.

Admitting that it is not an easy task, and perhaps it’s not always the best outcome, Schrade added that he is not convinced that regulators need completely new frameworks or approaches. “Regulation must become more technology oriented. We do not regulate technology. We regulate actors and business.”

Lawton followed with three reasons as to why he sees challenges for regulators. The first reason, he said, is the mismatch between the technology cycle and the regulatory cycle. “The regulatory cycle, by which I mean the time it takes to identify a problem, work through what the proposed response might be, consulting on the rules, implementing, is way longer than 12 to 18 months so there is a potential mismatch between the technology cycle and the regulatory cycle.”

The second reason is that regulatory architecture focuses on putting obligations on regulated entities, on the assumption that that’s where the risks are centered. In an environment in which some of the key services for regulated firms are delivered by outsourced entities, having a regulatory architecture which still puts on the responsibility for oversight on the regulated firm becomes less of an effective technique, he said.

Third, Lawton noted the difficulty of writing regulations for new risks, like cyber. “For most risks, you can be quite definitive, if not prescriptive about what you want the regulated entity to do. And the regulated entity can demonstrate to you that they’ve done it. With new risks like cyber, it’s just impossible to be prescriptive about what good looks like, because it’s a continually evolving issue and, therefore, the firm can never demonstrate to the regulator that job has been done.”

Collaboration Remains Top Priority

When asked for their insights into how, in an increasingly fractured, but also globalized world, the industry can derive the potential benefits of disruptive technology, but also make sure that the innovation can be delivered on a reasonable time scale, the panelists spoke of industry collaboration.

Lawton recognized that markets, in many cases, operate globally and, the key is to collaborate with other regulatory authorities around the world, coming up with, where possible, international standards on how to approach things.

Collaboration ensures a level of consistency, Lawton said, allowing regulators to look across to other jurisdictions and know that they’re meeting similar standards that lead to similar outcomes.

Schrade noted that we still see a lot of different approaches or a lot of different traditions and to modernize the legal framework globally will be very difficult. “However, I would not be so pessimistic because in the last five years we have seen already some convergence,” he said.