Earlier this month, The Depository Trust & Clearing Corporation (DTCC) released the results of its second annual Systemic Risk Barometer. The Barometer assesses and measures the financial industry’s sentiment on significant and emerging trends that impact the safety, resiliency and continued sustainability of the global financial system. The data for the Barometer was compiled from responses from DTCC clients, including broker/dealers, banks, service bureaus, mutual fund companies, hedge funds and insurance companies. This year, the survey was further extended to regulators, academics and members of research organizations globally.
With three of its subsidiaries designated as Systemically Important Financial Market Utilities (SIFMU), DTCC is deeply committed to delivering risk mitigation solutions to meet the industry’s broad and evolving needs.
Michael Leibrock, DTCC Chief Systemic Risk Officer, spoke with @dtcc about the prominent risks identified by the Barometer and initiatives DTCC has launched to mitigate those risks for clients and the industry.
@dtcc: What were the top five risks identified in the DTCC Systemic Risk Barometer?
Leibrock: The top five risks identified as risks to individual firms were: Impact of New Regulations, Cyber Security, Significant Business Continuity Event, Disruption/Failure of Key Market Participant and Major Compliance/Governance Event.
Meanwhile, when asked to rank the top five risks to the broader economy, the choices included Impact of New Regulations, Cyber Security, a U.S. Recession, Disruption/Failure of Key Market Participant and Liquidity Risk.
@dtcc: The list tracks closely with your findings from 2013. Did this surprise you?
Leibrock: Many of the risks covered in the survey have existed for some time and consist of large, highly complex, global issues, none of which have easy solutions. The topic of unintended impact of new regulations remains at the forefront due, in part, to the fact that the industry is still grappling with the implementation of numerous new rules as a result of Dodd Frank. Additionally, cyber risk remains near the top, reflecting the increasing number of cyber-related attacks that have occurred during the past year and the heightened media coverage of such events. Lastly, the risk of a failure of a key market participant also remains a top-five concern. This is possibly due to the ongoing debate about whether the “too-big-to-fail” issue has been sufficiently mitigated, despite numerous new regulations aimed at making large banks safer through closer supervision, enhanced capital requirements, etc.
@dtcc: What initiative(s) has DTCC launched to address these risks?
Leibrock: We are committed to addressing the issue of systemic risk in a comprehensive manner and have launched a number of key initiatives over the past year. Among the higher-profile ones in which DTCC is playing a significant role are:
- Participating in the industry-wide Quantum Dawn exercise to test the response to, resolution of and coordination for a wide-scale cyber attack;
- Working with lawmakers globally to support policies that enhance information sharing and critical infrastructure protection and to develop a cyber security framework as directed under U.S. Executive Order 13636;
- Drafting proposals to shorten the settlement cycle for U.S. cash securities transactions;
- Developing a Margin Transit Utility – the industry’s first comprehensive, straight-through-processing (STP) solution to streamline the management and settlement of collateral; and
- Developing a central resource to collect and manage client reference data necessary to meet regulatory requirements and other business needs.
@dtcc: You recently met with regulators in London, Brussels and Paris about the survey. Is their focus on systemic risk in line with the top risks identified by the survey?
Leibrock: For the most part yes, the majority of the supervisors I met shared similar concerns about the top risks highlighted in DTCC’s survey. As previously mentioned, the risks covered in the survey are global in nature so regulators in Europe have been extremely focused on trying to mitigate such risks through many different avenues, with The European Market Infrastructure Regulation (EMIR) representing perhaps the most significant. EMIR is a European Union regulation designed to increase the stability of the over-the-counter (OTC) derivative markets throughout the EU states. It entered into force on August 16, 2012, and introduces i) reporting and clearing obligations for OTC derivatives, ii) measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives, iii) common rules for central counterparties and for trade repositories, and iv) rules on the establishment of interoperability between CCPs.
@dtcc: Can you tell us about the next steps for DTCC in terms of addressing systemic risk in the financial marketplace?
Leibrock: As mentioned earlier, DTCC is already quite active in many different risk initiatives, both individually and in partnership with various industry stakeholders. These efforts will continue. In addition, the Systemic Risk team I manage will now use the results of this survey to engage with our clients and supervisors throughout the remainder of the year to identify new risk mitigation opportunities and where practical, commence new risk initiatives through the appropriate processes. This engagement will likely include a combination of bilateral meetings, industry events, webinars, etc.
For more information:
DTCC Systemic Rick Barometer Results Overview