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Banks wasting billions on inefficient clearing

So the morning continues with the innotribe team discussing digital identities, with contributions from a wide range of folks, including:

The discussions were interesting, particularly as SWIFT used this session to announce that they have taken the Digital ID project to a new level such that anyone can transact with confidence online.

I enjoyed the session and will blog more about it later, as we have a deep dive into the new infrastructure all through this afternoon.

The real challenge here is that it has been tried many times before, but that is no reason not to try again.

Anyways, after that delicacy, it was off to the next plenary session. 

I was particularly interested in this one as it’s all about the plumbing.

Clearing and settlement, for those who prefer to call it that.

This debate focused upon the post-Crisis Financial Transaction Infrastructure: what will it look like, and what do the changes mean for market participants?, and featured

  • Michael Bodson, Chief Operating Officer, Depository Trust and Clearing Corporation
  • Werner Steinmueller, Managing Director, Head of Global Transaction Banking and Member of the Group Executive Committee, Deutsche Bank
  • Lawrence Sweet, Senior Vice President, Federal Reserve Bank of New York

Ably chaired by Dominic Barton, Worldwide Managing Director, McKinsey & Company.

Larry Sweet kicked off, saying that the “clearing system was a source of strength through this crisis.”


He made some key points, and the line: “we’ve learned what was extreme is now plausible and what is now plausible is increasingly extreme”, is a classic.

His conclusion is that we need “to make sure that the settlement and clearing systems are working coherently and towards the greater good to reinforce each other’s actions between the regulators and the market participants.”

Sweet’s key lines were in this opening, where he stated that, from a regulatory view, “there is no end point, just a beginning and the trick is how far are we towards completing a coherent vision?  This should be the basic principles of safety and efficiency we should be striving to.  This includes the things I’m working  on such as the principles for market infrastructures.  We expect to have that completed early next year, in terms of a vision.  Once that’s out there, think of the process that then has to take place.  The participants first have to embed that vision in their processes.  Then all the clearing and settlement systems have to come to grips hopefully with saying that this is a vision with which they can accept and implement.  Then everyone has to work on getting the system to interoperate with that vision.  This is a long process.

Michael Bodson from the DTCC took this dialogue a step further, saying that he agreed “that we're still at the stage where we are beginning to execute the vision”, and that “LEI is a great example of standardisation.”


He made me smile when he said that "global coordination keeps me awake at night. That and understanding all the regulation.”

Too right.  As I tweeted a question to the panel, which was unanswered, I asked whether global regulation is actually feasible when regulators cannot even agree on the definition of what constitutes a speculative OTC Derivative.

Werner Steinmuller was next, and he opened by saying that he sees “a big trend from bilateral clearing to central clearing to central counterparty clearing.  That is concentration and concentration means huge budgets.”


He asked for more transparency from a regulatory point of view – don’t we need this from the banks? – and that the markets need to tackle the issue of unlimited exposure by limiting counterparty.  Interestingly, Werner said that “there is no risk free system but we are trying to make it better.”

Yep, we’ll always have risk.

A final key point he made, that led to much wider debate, is that "we need to help smaller banks and smaller participants in creating new business models."

 For the rest of the debate, I followed the tweets going to #SibosBID as there were many running key quotes from the session.  Here’s a hand-picked few:


“We must not open the door to regulatory arbitrage.”

“If a CCP is failing, I want to know how we liquidate it.”


“If I was running a credit default swap house, I would never sleep.”


“No one is going to make the world safer by putting transactions into unsafe central clearing systems.”


“From a bank’s point of view, systems are changing and we need regulators therefore to be very clear.  We need sophisticated regulators who have understanding and together come to solutions without overdoing it.  We have to work together in an active dialogue. “


“Fifteen years ago we were discussing how to solve the issue of foreign exchange settlement risks and it led to multiple initiatives around the world which, in its evolution, began with multiple initiatives and eventually ended up with CLS so that now we have $4.6 tn a day being settled with confidence through this crisis.   So when you have a clear vision and everyone working towards it, it can be done.”


“Concentrating the risk is not a bad thing – if it's well managed. Fragmentation is never the right way to work.”

Finally, I wrote down virtually word for word Bodson’s discussions of the costs of clearing and settlement globally.

It went something like this:

“There is going to be a change in the business model. There has to be.  Bu the industry has invested in infrastructure that works very well, in Swift, in the DTCC and more.  We have spent an incredible amount of time and money and effort ton these, but i am not sure they are aligned.  Therefore we need to shift these so they are aligned rather than starting again.  It’s not a question of putting more into investment banks or transaction banks, but how to use us more effectively and efficiently.

“This comes back to Giovannini – how many networks do you need, how many CCPs do you need, how many platforms do you need and so on and so on.  The OTC markets are full of inefficiencies and just last week we saw how things can go awry. 

“This results in cost.  The cost of clearing and settlement is about $10bn for the top 10 banks and another $5-$10 billion for the infrastructure; so we could save a sizeable amount if we just aligned and were more efficient.  And I’ve probably underestimated by a factor of two or three.”

Wow – so much cost in infrastructure and, after all this time, the panel admits it is not aligned or efficient.

Seems a bit of a shame if you ask me.

Ah well, off to lunch.



About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Felipe Ledermann

    Nice summary. Have you see any discussion about Emir and Dodd Frank impact to OTC CCP´s?