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THE STORY OF THE DEPOSITORY TRUST & CLEARING CORPORATION
for decades. In other words, DTCC 3.0 would significantly alter how the firm would support and work with clients to identify and mitigate risk while minimizing costs as much as possible. DTCC’s Systemic Risk Office identified processes and events that were risks for the firm and the financial markets more broadly and implemented new ways to reduce them. DTCC needed to make sure it was reinforcing and emphasizing the importance of risk to its employees, so the firm coined a tagline: “Everyone is a risk manager.” At the same time, DTCC began overhauling the processes and technologies to strengthen the risk management function. “We made a significant change in the infrastructure that supports the work we do, particularly in financials, and then all of the other applications that sit on that infrastructure, including rebuilding our models and adding automation so it makes it easier for people to access information,” said Andrew Gray, former managing director and group chief risk officer. DTCC continued what it would call “default simulation” well beyond the 2008 financial crisis. Gray detailed the process: We’ll take an actual portfolio today, but we’ll add a stress from a prior period and use that to amplify the stresses that could be placed on that portfolio. Then we call the next step to say, “So now they’re defaulted, what do we need to do from a hedging standpoint? What do we need to do from the standpoint of closing out the portfolio? What’s the profit? What’s the loss?” So we can exercise that and make sure we have adequate resources to be able to deal with those situations. We also simulate a multi-firm failure, so not just one firm failing, but multiple firms failing. Then, we game out where that can lead us. This type of preparation is what helped DTCC seamlessly close out MF Global, a major commodities broker, when they collapsed in late 2011. DTCC’s Fixed Income Clearing Corporation (FICC) subsidiary was able to liquidate MF Global’s Government Securities activity with no impact to clearing fund deposits.
A Dark Knight
While failures and frauds occur somewhat infrequently, a technology glitch is much more common. But when it involves a number of erroneous trades being directed to the New York Stock Exchange and then on to DTCC, it can send shudders throughout Wall Street.
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