(Editor’s note: This is an excerpt of his remarks to the 38th Annual Operations Conference of the Securities Industry and Financial Markets Association, May 2, 2011, in Boca Raton, Fla.)

May 3, 2011 – Let me begin with that weighty question about why the chicken did – or did not – cross the road.

We all know the old joke that poses as a question: “Why did the chicken cross the road?” The answer, of course, depends on who you ask. If you put the question to Captain James Kirk of the Starship Enterprise, the answer is likely to be…”to boldly go where no chicken has gone before.”

We’ve had some experience at The Depository Trust & Clearing Corporation in boldly going where no one in their right mind would want to go. We had to cross over to the far side of the road during the financial meltdown in 2008. We went because we had to sustain reliability and manage risk across all the industry’s infrastructure systems during those frightening weeks. In the wake of the Lehman Brothers collapse, we closed out more than a half trillion dollars in open positions, we prevented losses for the industry and, perhaps ultimately for taxpayers, that could have been in the hundreds of millions or billions of dollars.

We’re proud of that accomplishment. But it’s not the way we like to do business, and it’s not the way you like us to do business. We would rather have our risk controls work so well that we never have to step out into the traffic on the road. It’s no secret that the Fed and our other regulators are also eager to keep us from having to cross over that road during emergencies.

In response, we are completely overhauling our whole approach to risk management at DTCC. We have given it a new structure, a new discipline, a more focused approach and more dedicated resources.

For example, in addition to an office of “Systemic Risk,” we now have a revamped governance structure, starting with the split in the functions and responsibilities of the Chairman and the CEO. Bob Druskin, who joined DTCC as its Executive Chairman last month, has direct responsibility for the firm's risk and control functions. As CEO, I retain responsibility for DTCC's businesses, technology and operations.
We also have:

  • A consolidated risk oversight structure, reporting in to Mr. Druskin through a new Group Chief Risk Officer position.
  • A "three lines of defense" structure, with risk officers embedded in each of our lines of business,
  • A new, much more intense process for evaluating the risks of new products and services,
  • A substantially beefed-up and aggressive internal audit system, and
  • An enhanced operational risk organization.
  • As part of our more structured approach, we now target our risk management activities toward four key areas.
  • Monitoring and managing systemic risk,
  • Managing risk within DTCC itself,
  • “Raising the bar" on how effectively we help our customers manager their risks, and working closely with regulators on market transparency and risk control.

These efforts aim to ensure that the infrastructure supporting the markets is as robust and as resilient as it is humanly possible to make it.

An important aspect of this focus on infrastructure resilience is the likelihood – realistically, the certainty – that DTCC, or at least our main subsidiaries, will be designated “systemically important.”

That will involve significant changes in how we operate and how we interact with our members. Similarly, European authorities are moving to implement a "systemic risk" oversight structure over the European markets to address many of these same issues.

For example, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions have developed a new set of proposed global standards for depositories and clearinghouses, "principles for financial market infrastructures," to use their new phrase. While these "principles" build on the existing standards, they also incorporate some significant changes that will represent a challenging agenda for us in the coming years, including an increasing focus on settlement finality, and ensuring that finality is achieved as early on the settlement date as possible.

The push for standards to be global underlies another issue the industry faces - the need to recognize and identify our counterparties. The Treasury Department wants to see the introduction of a numbering system that can not only be used to identify legal entities involved in securities transactions, but also provide background information on them. Think of it as a Committee on Uniform Security Identification Procedures (CUSIP) system for companies.

Creating this kind of system is a huge task, and you don’t have to think about it very long before you realize that having the system set up and administered by a global utility is probably the only cost-effective way to get the job done. Given our at-cost business model and experience as a utility, we think DTCC should play a principal role in creating and running this new system. We’re prepared to create economies of scale by operating the system globally.

We wouldn’t expect to take this on alone, however. Recognizing that the Society for Worldwide Interbank Financial Telecommunication (SWIFT) maintains a comparable system for identifying its global membership, we’ve had long discussions with SWIFT.

Under our plan, SWIFT would be the global registration authority to assign the legal identity numbers, and DTCC would be the facilities manager, using our Avox subsidiary, which we acquired last year, to collect, validate and maintain the core data record on each entity and its parent or subsidiary, marrying that with the SWIFT-assigned identification number.

You can rest assured that we are very actively working to protect the infrastructure and to protect you as effectively as we can against the complex and troubling risk issues we now, post-crisis, know that we face. And if you take any thought with you today, know that it is our intention to boldly go into the future … without ever having to cross the yellow centerline again.

This column originally appeared on Securities Technology Monitor.

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