Sibos 2014: Benefits of Financial Market Infrastructure Collaboration

At the first day of Sibos, Christine Cumming, chief operating officer at the Federal Reserve Bank of New York, and Andrew Gray, managing director, Core Business Management for The Depository Trust & Clearing Corporation (DTCC), joined Oliver Wyman’s CEO Scott McDonald in a discussion on the benefits of financial market infrastructures’ (FMIs) collaboration.
By Jake Safane(2147484770)
At the first day of Sibos, Christine Cumming, chief operating officer at the Federal Reserve Bank of New York, and Andrew Gray, managing director, Core Business Management for The Depository Trust & Clearing Corporation (DTCC), joined Oliver Wyman’s CEO Scott McDonald in a discussion on the benefits of financial market infrastructures’ (FMIs) collaboration.

The audience nearly all agreed with the panelists that collaboration across FMIs adds significant value, and 63% answered that the timing is right, as the pain that the industry is now dealing with is big enough to overcome some of the natural hurdles for greater collaboration.

In terms of which types of FMIs will benefit from collaboration the most, 39% chose the securities side, 22% chose the payments side, and 40% chose both.

The panelists also agreed that the industry benefits from collaboration between FMIs and regulators, and generally speaking, they are on the same page in terms of wanting to reduce risk.

“In terms of the objectives to reduce systemic risk, I think we’re very alike,” said DTCC’s Gray. The challenge is how you implement those objectives, he noted. An example of effective alignment and collaboration between the industry and regulators “is what we’ve done with the Legal Entity Identifier (LEI) system…we now have a global system for LEIs that is going to be critical to better understand systemic risk.”

On the other hand, though, not all plans turn out the way regulators may have intended, as the notion of unintended consequences has been a theme running throughout the recent regulatory reforms around the world.

“One example that comes to mind is with global trade repositories for derivatives, where I think the original objective was if you can get to a place where you can see all the information associated with all derivatives around the world, you would be able to spot potential issues or imbalances that you can be able to then more proactive in potentially preventing a crisis,” said Gray. “And I think everyone agreed that was a good thing. However, the way it’s been implemented is you now have a fragmented system. Thus, there’s a need to figure out how to pull all that information together now, he added.

Cumming, coming from the perspective of an institution that is both regulated and a regulator noted, “From a long run perspective, alignment of regulators and FMIs is very high. In the tough moments, we have very much the same stakes in mind as we think about what to do in those situations. But I think in the short run, of course there are conflicts.”

For example, she said, one of new principles for financial market infrastructures (PFMIs) asks for more liquidity, but that’s expensive in terms of time and the cost of maintaining additional liquidity.

Yet industry collaboration can be really helpful in terms of figuring out some of the potential disconnect between objectives and how to implement them effectively, she said. “Many of these are the ‘how’ questions…There’s a real opportunity for FMIs to share how you’re thinking about this principle, particularly for the ones that are more impactful in terms of cost and how you think about implementing that.”

These PFMIs seem to be a positive for the industry, provided that they are properly implemented.

“As a result of having these principles, we’re all now very clear about what the standards are and everyone is hopefully held to the same relatively high standard,” said DTCC’s Gray.

“While the objectives of the principles may be somewhat clear, how we get there may differ,” he added. “Unless we’re very careful, we run the risk of not achieving the goals that we set for ourselves…So I think we just have to be very thoughtful about how we achieve the objectives outlined by the principles.”

In terms of collaboration across FMIs, Oliver Wyman’s McDonald pointed to last year’s Memorandum of Understanding between DTCC and Euroclear, which has now resulted in a joint venture to offer a collateral processing service.

“Ultimately, the benefit for the industry would be reductions in risk and cost. It’s a great example where two of us can actually work together to solve a problem,” said Gray.

Cumming also noted that the industry can collaborate more for sharing information around anti money laundering (AML) and know your customer (KYC) regulations. “It’s really important for us that at the end of the day, each of the major players is responsible for AML and KYC,” she said. “But I think that we in public sector should be much more open than I think we were in the past to the possibility of utilities or other outsourced arrangements…[for] screening to be done outside the institution, as long as it really comes back to the bank.”

Going forward, Gray noted that FMIs are not planning to merge (until next year, he joked) “but what we are we are going to do is look at ways we can collaborate more effectively, and collateral management is just one example. And there are many different theories about what that collaboration might look like. It could be just sharing best practices, it could be in some cases joint ventures, but there are a range of different options.”

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