 So, hello, everyone, and welcome to this issue briefing on a very timely topic. Is there going to be a financial crisis in 2018? Apparently, this is a question that many people ask themselves, although the conditions right now seems to be very good. 4% GDP growth in the world economy, stock markets are booming, or maybe that's the reason why we are discussing this. Joining me here on stage today to discuss this topic are two distinguished panelists, Helen Ray, from the London Business School, a professor there in international economics, really a distinguished expert on international financial markets and one of her generation's leading economists. Thank you very much indeed for joining us. And we're also joined by Michael Bolson, president and CEO of DTCC, which really is the backbone of Wall Street. You're the one who really oversees all the flows, transactions. We like to call ourselves the plumbers of Wall Street. If anything happens, you will notice. That's for sure. And you have a very long industry experience from the financial market and several leading business roles in the financial system. So we're privileged to have you both here. So let's get started. And why not go back to the last crisis? Because one question is, are we still feeling the aftermath of that crisis? And to 2008, I remember in just a day or two after Lehman Brothers crashed, I attended a seminar at Harvard together with Ken Rogoff, an international economist. And I remember he was really shocked by what was happening at that time. Helen, if I begin with you, do you think 2018 will be a year when we will feel that shock again? So as you know, one of the first rule of an economist is not to make forecasts with a firm date on it. So I am obviously not saying we're going to have a crisis in 2018, also because we are effectively just recovering from the last crisis. However, I think what we are going to talk about is more the risks that we can still see in the world economy and in the world financial markets. And to start to kick off this conversation and to link it to the previous crisis, I think what is very, very still a big factor of risk, which is still with us, even though, as you mentioned, we have a cyclical pickup, we have a world economy being better, it is still the amount of debt that is in the economy. And there is a lot of debt, and a lot of debt is part of a legacy of a previous crisis. Public debt. It is both public and private debt. And as we know, in fact, during crisis times, there is a lot of fungibility between what is private and what is public. Sometimes private debt becomes public debt. There are some bailouts. We have seen that many times and we will probably see it again. But so what is, I think, pretty striking still at this point in time is that we are still dealing with an economy which has a lot of debt. Depending on the countries, the emphasis is more on the household debt, or it's more on the financial sector, it's more on the public debt. But what is pretty clear for all the macroeconomic research that has been done recently is that debt is a factor of high risk, and especially when debt comes after credit booms period. And this is typically what happened in the 2008 crisis. We had a massive credit boom, which was, in fact, very similar to what happened in the 1920s before the 1929 Great Depression. These two episodes, the 2008 and 1929, have a lot of similarity and both started by massive overvaluation of assets, massive credit booms, and ended up with a financial system meltdown and vis-à-vis the deepest crisis, the worst type of crisis. So we have just lived through one. And unfortunately, it has left us with this huge debt legacy which we are still dealing with. Is the last crisis... Would you say that the last crisis is over? We're still in the recovery phase? We are in the... Fortunately, we are seeing the end of the tunnel, so we are in the recovery phase and we are well in the recovery phase in some areas. So there's obviously some differences in the cycles. For example, the US is ahead of the euro area, but the euro area has been picking up very strongly that is good news. There are still some underlying fragility in the euro area. We can talk about those... We'll go into the details soon. But to complement this idea of why debt is an issue, well, obviously, what determines the cost of debt servicing is interest rates. And we are in a phase of ascending interest rates. It's good news because it means the world is recovering, so interest rates should go up. This is anticipated by the markets that the interest rates should rise so far. So that's fine. That's also the condition for a smooth recovery. However, there's always, you know, a possible danger that interest rates would rise a bit quicker than one expects. And in that case, that could have an effect on debt servicing, which we hope is one of the scenarios that a lot of risk managers have been considering, that you can never be sure. So that's one of the risk factors. So the plan has taken off since last time, Michael Botson. But is this the year? I'm going to ask you the same question. Is this the year where we will feel the shock again? I think I agree with Helene that if you look at the basic underlying strength of the economies globally, there's nothing to indicate that there's a looming crash. I think we are coming out of the last crisis. The U.S. now, with the stimulus of the tax cut, is going to be gathering speed. And, you know, the economy is going to be expanding that much farther. The growth of the wealth in the emerging markets, I think, is a counter-buffer to some of the weaknesses seen elsewhere. Debt is a concern, but if the economies continue to expand, then people should be able to absorb that. So I don't see a looming economic crisis. The question, you know, what is a financial crisis? Could there be a massive market correction? That's where I'm more concerned about, is that it's almost a Pollyannish environment right now, where, you know, we were talking beforehand, Trump gets elected, everybody thinks the market's going to go down, no, they go up. Brexit happens, everybody thinks the market's going to go down, no, they go up. Everybody is getting very used to a low volatility, upward sloping, you know, market, backed by a strong set of economies. But what if, what if we have a geopolitical issue? What if we have a housing crisis in China? What if Italy runs into problems, any of these things? What if you have a massive cyber attack? We can all talk about various homes. So the market has learned that it's dangerous to sell. Yeah, exactly. Because then you'll have to come back and buy at a higher level. If you're missing out, everybody's, you know, gaining, everything's going up. So what happens when... Is this a sign of a bubble? Historically, it has been. And are the markets ready? I mean, everything from risk, you know, you talk about risk managers, but every risk model is based on the volatility that they see, both in the past as well as the near-term future, and nobody is building in a massive change in the volatility profile. Nobody's anticipating a massive drop. So you have this crowd mentality. And when it starts happening, my fear is, you'll see almost what happened in 1987 with portfolio insurance, where people start selling into a down, correcting market, and it just starts exacerbating. And as the volatility picks up, then it just becomes a snowball effect. And that to me is the bigger impact. Now, does that equate to an economic crisis? I'm not quite sure. It depends on the depth of the drop. But you could see the markets having a very volatile and very violent correction. Market correction, is that what you're thinking about as well, and that is what we will see somewhere down the road? So as I said, I mean, I'm not making predictions for 2018 here. Somewhere down the road. And what we know from past experiences is that, indeed, there can be very large market corrections. Now, whether they translate into deep economic trouble or not, depends on how the risk is concentrated in the economy and effectively which agents bear the risk. It turns out that what history tells us is that if there is a risk concentration in the banking system, that's one of the worst possible outcomes, because if there is a banking system meltdown, this is usually a pretty deep economic crisis. Now, the financial system has undergone very, I think, important changes after the 2008 crisis, partly due to regulation, with Basel III in particular. And... More capital in the banking system. Absolutely, less leverage as well. That's a good thing in your opinion. Absolutely, as we know, leverage was one of the main key drivers of the 2008 crisis and a very big amplification factor. So, having a cat leverage across the financial system, the banking system is a good thing. Now, the question, and I think that's where we still lack a little bit of expertise, is what this new kind of financial system interconnections look like. Because some of the risks seem to have migrated out of the banking system into other entities, whether they are big asset managers, whether they could be insurance companies, whether they could be other type of actors, CCPs, possibly, all the planning that you are talking about. So, I think, at this point in time, we lack in-depth expertise about the interconnections of these actors, how vulnerable they are to a number of risks, in particular cyber security. Do we know where the risks are concentrated? Who should know this? Well, the regulators, I think, have a much better insight into risk concentrations. Just, again, through increased supervision, the capital rules, we run a trade repository for over-the-counter swaps that allow regulators to see concentrations of risk better than they ever have before. But there is a lot that's moved out. You used to talk about dealing with a crisis. One exercise we do on an annual basis is we simulate the failure of a firm. And we do it with our regulators. And it's just basically a firm collapse. Here are their positions with us. How do you liquidate them when we use an asset manager to simulate the liquidation process? And this year, we did a simulation and we simulated the collapse of five major firms one after the other, every two days, major firm collapses. And what was remarkable, we were able to survive the five collapse and absorb the collapse. But what I was telling was the size of their positions. And we only focus on the cash side of the market, so to be clear, so treasuries, mortgage backs, equities, corporate bonds. The size of their open positions with us, of the five banks, was about $350 billion gross. The size of Lehman Brothers was $350 billion gross. So the five largest banks right now, their positions have shrunk to that extent. And at the same time, obviously their capital has increased. But our margining, which is what we take in from our participants to protect ourselves against a liquidation process, has doubled at the same period. And I think that's very similar to what's happening across the street, is the measures of protection have increased, but the risks in the banks have definitely decreased. Now, the counter of that is banks have always been seen as a form of a buffer or at least a first cushion when market corrections happen. They're not going to stand and just get crushed, but they usually will work with clients in the first movement. Without that size inventory, the interesting part again is that cushion is now probably dissipated. So again, if you get a correction, it's not going to have a bump in the road just to slow it down, it may just continue down. So it is a bit of a mixed signal because all these positions have shifted to asset managers, to hedge funds, outside of the directly regulated marketplace. And that may not be as well understood. Right. And I would like to add that, so we have made some progress in understanding possibly interconnection in domestic due addictions. However, I think there is still a lot to be done in terms of data sharing and understanding interconnection across borders. So it's not that every counterpart is perfectly observed by all the key players, certainly not in the supervision side. I think there are still major issues there about how the network or the financial network work and when it's hit by a shock, how a big shock would unfold through the network. I think we cannot really have a very good answer to big stress test if international entities are involved. Now, when we did our trade repository, the initial concept was actually to have a singular repository of data information so that regulators around the world could see concentrations of risk in their marketplace but also across the marketplace. And we did some analysis that showed where you could look at credit default swaps and just by simple modeling, see if that if you stress the system, you had exposure of Japan to the United States or United States to France or you saw a big concentration in a company called AIG. You could actually see that. That was the concept behind the trade repositories. Regulators and not for lack of reasoning all designed the trade repositories differently because they were very focused on their own needs, their own wishes of their singular marketplace. But what you'd lost at that point was that ability to globally link exposures. We did a white paper on interconnectedness recently last year. It is the most complex of all the risks. But isn't it always like this that every crisis, in a sense, is unique? It's similar, but it's also unique and it will never be exactly the same as the last. Oh, you always plan for last crisis. We're perfectly ready for the 2008 crisis. We got it down. So, there was an experience that you have that you told me about when you, on your first day as CEO of DTCC, can you tell us about it? Because it shows how things are really changing and that new risks are emerging, risks that we don't think about that much. Now, this is, call yourself lucky. My first day as the CEO of DTCC was night capital. So, the first hour, the first day, night capital blew itself up. And as everybody knows, it was a trading algorithm that they had put in that triggered another program and they ended up buying basically all the opening positions on the New York Stock Exchange. And within a matter of minutes, they had accumulated about a $4 billion position and they were market making from it. They did not take on huge positions like that. So, we had the process of liquidating those positions and working with them and helping them survive until the weekends so that they could get bought out, et cetera, et cetera. But what happened that was fascinating and what scares me is the reason the problem was spotted was all the trades were going to the New York Stock Exchange. So, the floor traders and others saw the trades happening. They called up night and said, you have a problem. They went back and forth. They finally realized they had a problem. If those transactions, if you have an algorithm like that, that is actually running through the entire national market system, that it's not concentrated into one market, it could have kept running for 15 minutes, half an hour, so on and so forth, before their risk control was kicked in. That $4 billion position could have been multiples. Now, again, as a CCP, I'm responsible for liquidation, but absorbing the loss on a position of that size would have meant spreading the loss across the entirety of Wall Street. So, the disruptive nature of an algo going wrong is something we are very, very concerned about because, again, you don't see it. You don't see that concentration. You have a lot of market-making firms. You have a lot of day trading firms that are out there who will argue, I take no risk at the end of the day. During the day, I'll have a risk for microseconds so you don't have to worry about me until the clock stops in that microsecond between the buy and the sell. And we haven't gotten our heads around totally and we're working on figuring out risk modeling to protect ourselves against that. But that's a shock that we have not seen happen so far in the marketplace. So, the role of algorithms, Professor Rea... That's a major risk factor here. Is that something that you talk about a lot in your academic circles? This is certainly talked about a lot and cybersecurity in general. Now, being talked about a lot doesn't mean that people have solutions. And here, I mean, as I was listening to Michael, I mean, it clearly opens a lot of potential issues, including potential for hackers and attacks which could be pretty serious. I think everybody around, certainly around the world, supervisors are extremely worried about these type of issues. And unfortunately, indeed, I think we are not completely up to speed on that. So, I would rank that as one of the big threats for financial markets disruption, potential threats. And how can we hedge? Where is it going to happen? I always say as a CEO, I worry about one thing, which is everything. But the only thing that keeps me up at night is cyber. I mean, cyber comes in all different forms, in all different ways. We spend incredible amounts of money and time protecting ourselves as does every major infrastructure, as does every bank. But it's an arms race between us and the bad guys. It's really are the nation states that you really are worried about when you see what happened with Sony. There are players out there that have a lot of time and talent and are looking to probe and attack. Who should deal with this? Which body should be taking a lead here? This is the perfect example where public-private has to work together. Stephen Pelosi yesterday mentioned, he talked about it openly, about should national governments have networks built just for critical infrastructure? It's an interesting and very complex question. What happens during a resolution after an attack? The industry capable. There's something called sheltered harbor in the U.S. where retail information is backed up by banks and brokerage firms because the fear is if one bank gets wiped out and people can't get their money, you could have a run on the financial system because people say, well, if ex-bank records could get wiped out and they lose their money, I better pull my money out of every bank. So there's the method of backing up that's been created by the securities and banking industry to avoid that situation. But this is a very, very complex situation. And one of the issues again, and we've been public about this, is regulators, again, look at their marketplace, have very specific rules and applying to efforts for their marketplace. But something like ourselves, we're regulated by 20 different regulators around the world, spending an inordinate amount of time responding to compliance issues. But just because I'm in compliance doesn't mean I'm fully protected. I'd rather spend my time protecting myself and filling out checklists. And that's an issue also where, again, the right intention is to make sure people are meeting minimum standards. But it just takes a lot of time rather than saying, what's the right framework? We're running out of time and I also want to open up the floor for questions from the audience. But one issue we haven't been discussing, and is critical, I think, is the role of central banks. Professor Ray, so if there is a crisis, what can leading central banks around the world do to mitigate that? With the level of interest rates right now close to zero? Do they have any firepower left? Yes, they do. I mean, as we have seen, central banks have been key players in mitigating the 2008-2009 crisis and also the Eurora crisis after that. So I think we can be very thankful to the level of intervention of central banks over this last period. Central bankers were fully aware of the potential for disruption of the financial system, partly because of the 1929 Great Depression experience and had learned from that. So as you have seen, there has been several levels of intervention. Some was simply getting the interest rate down, then you hit the zero lower bound, but then there has been massive purchases of various types of assets which has been critical in restoring liquidity in some markets, particularly in the early stages of the crisis. So this is certainly, and then, of course, it has gone on with, as we know, several rounds of quantitative easing and various types of market intervention also by the ECB in the form of long-term refinancing operations for banks, for the banking system, which is another type of intervention but which also had the effect of restoring market liquidity and also banks' ability, in fact, to restoring their capital base in a way. So these interventions are still, of course, tools in the menu, in the panoply of the central banks that they can use at any time. Is there room of manoeuvre for the central banks? If anything, they learned, they have gained some more experience in using these additional tools thanks to the last crisis. So from that point of view, we know more that we did in 2008. So there was a lot of bold moves done by central bankers in 2008 which I think were the right ones. However, there was also a lot of uncertainty about the effect of policies. Now we've learned some more. We can reuse those tools. And, of course, depending on when the next crisis hit, which we all hope won't be in 2008, the interest rate will have time possibly to go back up to some extent, so it will give us another room of manoeuvre as well there. You agree with that? Never underestimate the power and the ingenuity of central banks. I think that's what it comes down to. They are remarkable for their ability to deal with crisis, go back to the Mexican crisis, go back to 2008. They will figure out something. They will figure out something, so... Because the interest rate back in 2008, the American interest rate was around four or five percent, right? So there was room. There was room. Back then. So that's one tool that may be taken out of their quiver. There are other tools. It depends how far back we go. But I just want to say the fact that central bankers can be very helpful in crisis should not induce more hazard in the financial system. No more hazards. And there has to be a lot more done in order to manage risk before central bank interventions. It's not desirable that central bankers are too often in that game, obviously. It should not be. Nobody wants to go back to the days of pre-DOT, Frank, or pre-reform. I don't think any bank CEO will say they want to go back to those risk profiles. I think they've gotten comfortable that there is a new business model and it's hard to get a high ROE right now, giving the capital, but they also feel much more secure that the system's much safer. Okay, let's open up the floor for questions. If there is any here in the room, anyone who wants to ask a question, please. So, Mike, can state your name. You talk about this Polian-ish environment we're in. What do you think is the potential catalyst for things going wrong and volatility coming back with the vengeance? And can this central bank normalization shrinking of balance sheets and moving away from risk assets? Is that a potential trigger? And if not, where do you see the danger, I guess? It's what we said. Unfortunately, you can't see the crisis come to me. You're good. You're avoided. It could be a geopolitical event. It could be a massive cyber attack on critical infrastructure. What if North Korea attacked the US electrical grid successfully? What would that mean to the marketplace? So, I think it's the two steps of a placid, low volatility market combined with an external event of consequence. What if North Korea launches a missile over Japan and all of a sudden it veers off course and actually hits a kite out? What are the ramifications of that? What does Japan do? Is there a housing collapse in China? So, I think it's not going to be here is the crisis, here is the... And you go back to 2008, it was the over leverage, but it's primarily the lending into the housing market that was the big catalyst behind that and all the follow-on ramifications. I think in this situation, it's the market's ability to absorb the great unknown of whatever it could be. And whatever it's going to cause the crisis, it's nothing we talked about today. So, I agree that any kind of this type of events could be a shock, but I think the magnitude of the shock will be more likely to be disruptive. If it operates indeed in an environment in which liquidity is withdrawn, maybe at a higher rate than has been anticipated by markets. So, this is why I think it's interesting to look at whether, for example, the current fiscal package of the Trump administration could lead to the Fed tightening quicker than expected by the market. And if so, and if liquidity is withdrawn a little bit at a higher rate than anticipated, I think any type of this shock would probably be more potent. Question there. I think that will be the final question before we close. Thank you. Chris Ikeos. Mr. Buttson, obviously, you're overseeing most transactions, but where do you see the biggest concentration risk as of today? Obviously, 2007, 2008, it was in the mortgage space, but where do you see, if you look at asset classes as of today? Oh, Bitcoin. No, I think it's... I don't see a particular asset class that's extended. I think it's what Malin said that the low interest rates have pumped up all assets. I mean, housing prices are back to 2008 levels in the United States. The stock market obviously is hitting new highs. Bonds are overpriced historically. Commodities don't seem to be quite as frosty. Cryptocurrencies, I mean, $350 billion give or take in terms of market value. I think they are bubble, but they're not large enough to impact a man on the street. So, I think that's one of the difficulties. I can't sit here and go look at this one space. You know, there's a real concentration there. Everything, I think, is extended and is based upon a very rosy forecast, which I don't think is crazy, given everything that's going on. But again, what happens when something veers off course? Professor Ray, concentration of risk. Any asset class that you are particularly worried about? No, I fully agree with Michael on that point. I think, yes, the low interest rate environment has popped up pretty much a lot of valuations. And so, if risk premiums are widened, it's going to be a price correction across the board in a number of markets. And a wealth effect, I guess. And a wealth effect, again, playing very differently depending on the different countries, because there's a lot of heterogeneity in transmission from wealth to consumption across borders. And how much will the wealth effect hit the real economy? That's precisely my point. It depends a lot on the country. The consumption will go down. Well, it depends very much on the country you look at. I mean, estimates of that vary greatly between the US and continental Europe, for example. Okay, on that partly optimistic, partly pessimistic note, thank you very much indeed for joining us here today and thank you all for attending. Thank you very much. Thank you, Peter.