More than 30 senior-level risk and operations executives from across the financial services industry discussed the impact of fintech and interconnectedness risk across the systemic risk landscape at The Depository Trust & Clearing Corporation’s (DTCC) Q3 Systemic Risk Roundtable held on Monday, September 25 at DTCC’s Jersey City office.
The Systemic Risk Roundtable series is a component of DTCC’s ongoing engagement with its clients and key stakeholders to increase industry awareness of systemic risk issues and share insights on new tools and resources to help reduce systemic risk.
The roundtable provided a platform to discuss how technological innovations are impacting the stability of the global financial markets. “While the transformative potential of fintech holds great promise, it could also have systemic risk-related implications that could be beneficial or harmful,” said Michael Leibrock, DTCC Managing Director, Chief Systemic Risk Officer and Head of Counterparty Credit Risk.
To help gain a better understanding of fintech’s potential impact on financial stability, DTCC issued its new white paper, Fintech and Financial Stability - Exploring How Technological Innovations Could Impact the Safety & Security of Global Markets, which shares DTCC’s views on fintech’s potential to strengthen or weaken financial stability, and a framework for assessing the potential systemic impact of fintech applications.
Fintech’s Contributions and Impact Across the Financial Ecosystem
Jennifer Peve, DTCC Executive Director, Business Development and Office of Fintech Strategy, explained the key attributes associated with the fintech environment and how these characteristics are changing/influencing behavior across the broader financial ecosystem. During her presentation, Peve touched upon the emergence of new firms and interconnections across the fintech sector.
Peve also highlighted some of the strategic investments made by DTCC over the past years to enhance its fintech capabilities -- considering blockchain governance as a service and exploring optimization of various risk and settlement processes through the use of advanced AI.
Peve discussed fintech’s contribution to risk across the global financial system, exploring emerging risks and key considerations that must be addressed to maximize the returns that the industry can achieve. She noted that as fintech innovations advance and new ones emerge, financial services firms will see certain roles require new or expanded skillsets. She gave coding as an example saying that skill will be increasingly more in demand and more relevant to firms in the future.
Systemic Risk and Fintech
Adrien Vanderlinden, DTCC Executive Director and SRO Team Lead highlighted some of the drivers behind fintech’s exponential growth, such as the ability to deliver financial services with more convenience and increased speed at a competitive price point; technological advances that have lowered the barrier to entry for start-ups and other non-financial firms; and continued cost pressures on banks, which have prompted them to find new, creative ways to realize savings.
He also reviewed recent findings by the Financial Stability Board (FSB) and the International Monetary Fund (IMF) regarding fintech’s potential impact on systemic risk. The FSB report concluded that, while there are currently no compelling financial stability risks from emerging fintech innovations given the relatively small size of the fintech sector relative to the financial system, experience shows that they can emerge quickly if left unchecked. It also underscores the need for international bodies and national authorities to take fintech into account in their risk assessments and regulatory frameworks. The IMF paper found that boundaries among different types of service providers are blurring and that competitive forces are shifting as a result of changes in barriers to entry. With respect to policy issues, the IMF argues that regulators need to carefully balance efficiency and stability trade-offs. The IMF paper also highlights the importance of international cooperation.
He concluded his presentation with an overview of worldwide regulatory efforts to curb fintech’s risks while maintaining its potential for transformational enhancements. Regulators around the world have taken notice of fintech’s growing prominence. International standard setting bodies are also keenly interested in fintech developments and the potential impact of these developments on financial stability. Given the potential for fintech to affect the financial ecosystem in ways that could be positive or negative, the regulatory community’s main challenge is to create policies that manage to effectively curtail fintech’s risks, while preserving its promise to fundamentally enhance the provision of financial services. Regulatory sandboxing is one of the tools used to help achieve this balance.
These two fintech focused sessions were positively received by roundtable attendees and generated additional excitement ahead of the upcoming launch of DTCC’s white paper. Attendees expressed strong interest for additional discussions on developments in the fintech space as well as continued learnings on techniques and best practices that could be applied within their respective firms and functions.
Collaboration across DTCC’s Risk Disciplines to Assess Interconnected Firms
In the final session of the day, Scott Kaufman, Director, DTCC’s Systemic Risk Office (SRO), gave an update on DTCC’s interconnectedness risk initiative and how this initiative facilitates SRO’s contributions to DTCC’s process for conducting credit risk reviews for its members.
Dan McElligott, Director and DTCC’s Counterparty Credit Risk Team Lead, led the discussion on how SRO’s contributions, from an interconnectedness perspective, are integrated into the member credit risk review process to provide a more comprehensive view of the relationships across DTCC’s members from a credit risk perspective.
The session concluded with a discussion on the benefits of collaboration across DTCC’s risk disciplines, to holistically assess the risks posed by interconnected firms. Some of these benefits include the generation of a risk ranking for each member, an increased understanding of all the touchpoints between DTCC and its members, the evaluation of a firm’s financial and operational performance as a component of its credit review and an awareness of the potential propagation risk in the event of a member failure.
“This collaboration is one example of the benefits provided by teaming across our various risk disciplines, which is an ongoing focus area and priority both within Risk Management and DTCC as a whole,” stated Scott Kaufman.
Upcoming Systemic Risk Events
Invitations for the Q4 2017 DTCC Systemic Risk Roundtable, which will be hosted at DTCC’s office in Jersey City, NJ, are scheduled to be circulated shortly.
For more information, including requests to attend, please contact Paul Jordan, DTCC Director, Systemic Risk Office, at [email protected].