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Systemic risk was a focus of this year’s DTCC Executive Forum, held in New York and attended by more than 150 clients, DTCC executives and industry experts from academia and industry groups.

The day began with a roundtable on the top systemic risks facing the industry and DTCC’s proactive approach to systemic risk. Michael Leibrock, DTCC Vice President, Systemic Risk, led the discussion and shared the results of a survey DTCC recently conducted of client firms.

The impact of new regulations on financial markets is the top systemic risk, according to survey. Other leading risks for the industry and the broader economy include the disruption or failure of a key market participant, cyber-security, a major business continuity event, sudden dislocation in the market, partial or full Eurozone breakup and another U.S. recession.

“Crises have been occurring for centuries, but over the past 25 years, the frequency has increased dramatically,” said Leibrock. “Continued vigilance is needed despite recent economic news that things are looking up, because complacency following crises often lays the foundation for the next systemic event.”

During the break-out discussion, attendees shared information on specific concerns affecting their firms. “Costs of regulatory compliance keep going up and this definitely has an impact on our downstream operations,” said one senior executive. Another noted, “Regulations don’t create systemic risk, but they are a burden, especially when the full set of rules isn’t yet ready and we’re not sure exactly what we’ll have to do to comply.”

Building blocks for tackling systemic risk

The Forum’s first panel discussion on systemic risk focused on changes needed to create a more automated, standardized and shortened U.S. settlement system to reduce liquidity and counterparty exposure risk and its potential to become systemic during a crisis. Panelists agreed that settlement matching, settlement finality and intraday settlement are all key enablers toward reducing liquidity and counterparty risk and freeing up regulatory and risk capital.

One panelist made the case for intraday settlement finality. “What rallied us as a team was the realization that thousands of securities trades are reclaimed every day, a total of about $5 billion on average.” Typically, reclaimed trades can occur when trades are not matched prior to settlement date, thereby creating uncertainty and concern about liquidity and collateral exposure.

“DTCC settles about $560 billion in securities trades a day,” said Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services. “With Settlement Matching, we will introduce new risk management controls to increase settlement certainty for our clients as well as downstream investors. Being sensitive to not adding additional cost to the process, we will implement the Settlement Matching in a manner that leverages the trade affirmation done further upstream. This not only minimizes any additional costs, it also promotes STP [straight-through processing] and industry best practices.”

Shortening the settlement cycle was seen among the panelists as another solution to reduce systemic risk by collapsing the time span of collateral exposure, and driving much needed efficiencies in the overall financial system and reducing capital requirements.

“It’s time to revisit an accelerated settlement cycle,” said Murray Pozmanter, DTCC Managing Director and General Manager, Clearing Services. “The building blocks are all there. Automation is increasing, the technology exists and the cost-benefit analysis makes a strong business case.” He noted that last year, DTCC commissioned Boston Consulting Group to conduct an industry-wide cost-benefit analysis on options for a shortened settlement cycle. (To see the study, go to

“From a buyside perspective, it’s a matter of better managing counterparty risk and the amount of time you have that risk,” said another panelist. “Reducing our collateral exposure and liquidity requirements allows us to free up our capital for more revenue-generating operations.”

Shortening the settlement cycle was viewed by all panelists as one of the best ways to remove as much waste and risk in the current financial system as possible.

“From a clearinghouse standpoint, the benefits of a shortened settlement cycle would be profound, especially in times of market stress when having to collect more collateral and constantly having to reassess counterparty exposure are most critical,” said Pozmanter.

DTCC will be making a recommendation on shortening the settlement cycle later this year, after engaging the industry on how best to implement this solution, the exact costs required and how this initiative will work with other operational efficiencies already underway.

Looking ahead

The second systemic risk panel discussed future risks facing the industry, especially the threat of global contagion during a crisis stemming from an increasingly interconnected marketplace.

One panelist argued that while lessons have been learned from the 2008 financial crisis, markets are still fragile and the industry’s ability to absorb risk may be more difficult today because in order to comply with regulations, firms need to become bigger. “The industry is asking itself more and more whether it can afford to be in certain markets,” said the panelist. “This will lead to further specialization and, therefore, risk concentration as the industry looks to squeeze out costs.”

There was broad consensus that the industry needs to anticipate and manage the massive changes that will take place in the next five to ten years, and that some firms will struggle, while others will prosper.

“What we need now are better stress tests on the system, in good times and in bad, so we can regain the public’s confidence that the banking system can survive the next systemic event,” said another panelist. “Stress testing reveals vulnerabilities, but we need to vary the scenarios each time, otherwise we’ll just ‘teach to the test’.” Other panelists agreed that “herding” to one scenario with a small range of models is dangerous and doesn’t serve the intended purpose of stress testing.

One panelist made an impassioned case for derivatives as a hedge against counterparty risk to “buy protection” and reduce financing risk from both sides of a trade. He cautioned that in the future, the industry will have increased demand for more liquid securities. This can lead to a potential global shortage of liquid collateral, forcing creditors to accept lower-quality collateral from their customers.

The panel concluded by discussing the need to better balance the tension between regulatory rules and principles. While some believe the principles are more flexible and allow each institution to tailor its approach, others view them as ambiguous and therefore prone to obfuscation. In contrast, while strict rules may force compliance, they can overly concentrate risk because they don’t take into account the uniqueness of each bank but rather make sweeping industry rules that are prone to arbitrage.