Collaboration and utilities key to FMI success

Collaboration between international financial market infrastructures (FMIs) and the development of industry utilities will be a key factor in removing systemic risk and reducing costs for industry participants.

Citing a study that showed firms spend $110 billion on post-trade processing, Andrew Gray, managing director, core business management at the DTCC, said significant sums could be saved. “Only $10 billion of that is going to the DTCC, so that $100 billion is an opportunity to do more by looking at what processes we can ‘utilitise’,” said Gray. “It is a dialogue for the industry, but it is also about collaboration between FMIs to avoid overlap.”

Gray was speaking at the opening of the Market Infrastructure Forum yesterday. Another panellist, Christine Cumming, chief operating officer (COO) at the Federal Reserve Bank of New York, said progress on how to collaborate was accelerating, thanks in part to the work of the Committee on Payments and Market Infrastructures and International Organisation of Securities Commissions (CPMI-Iosco). CPMI-Iosco’s Principles for financial market infrastructures set international standards for all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories that are collectively called financial market infrastructures.

“There is a high degree of consensus about where we need to be heading,” said Cumming. “The role of FMIs has grown dramatically and we are looking for new ways of managing risk beyond bilateral arrangements. I would emphasise the need to reduce complexity, and the CPMI-Iosco principles will be extremely helpful as we align across countries.”

Gray said that, while there had been attempts in the past to create industry utilities, few had really succeeded, but there were different pressures today, such as the cost of compliance, that are combining to make their creation a necessity. “People are looking at things that aren’t adding to the business and asking if they really need to do it themselves,” he said. “Over the past couple of years, DTCC and others have been looking at where we can help.”

He pointed to the Clarient Entity Hub operated by a joint venture between DTCC and BNY Mellon, Barclays, Credit Suisse, Goldman Sachs, JPMorgan Chase and State Street. Expected to launch later this year, the Entity Hub is a reference data utility addressing risk management requirements, including know your customer (KYC), Foreign Account Tax Compliance Act (Fatca) and other client data and documentation issues.

Cummings said another area for collaboration could be in addressing the “rapidly escalating threat” of cyber crime. “The identification of systemic risks is a ripe area for collaboration,” she said. Much of the regulatory effort such as stress tests and recovery and resolution were looking at long-term impacts, but it was important for infrastructures to be able to consider all potential effects of changes in market behaviour. “Where there is change there is risk,” she said. “It is very important that we are mindful of where change is taking us – it’s usually easy to see the upside – but what are the downsides?”