Michael C. Bodson, DTCC President & CEO
The G20’s virtual summit in March was an important step in creating a unified global approach to the coronavirus pandemic. As millions suffer around the world, I couldn’t agree more with the G-20’s statement that “global action, solidarity and international cooperation” are needed and that the impact of the virus “is a powerful reminder of our interconnectedness and vulnerabilities.”
The pandemic is affecting all of us in ways large and small. As the G20 summit made clear, this must be an effort that crosses all borders, and it brought to mind the approach our industry embraced during the global financial crisis in 2008. While the causes of current and past market disruptions are very different in nature, the impact has been very similar: Fear and uncertainty creates extreme volatility that churns the markets, resulting in heavy trading volume and wildly fluctuating stock prices. Trillions of dollars of value evaporate, adding new stress about global economic security as well as long-term health.
No one can predict the highs or lows in a market, but it’s important to remember that while the markets may be in turmoil, the infrastructure underpinning them is rock steady. That structure, which is responsible for processing hundreds of millions of financial transactions each day and mitigating the credit, market, liquidity and systemic risk that is associated with them, establishes the guardrails that work hand in glove with stakeholders to provide certainty that rise or fall, the global financial system will continue to operate effectively and efficiently.
It can be easy to overlook the essential role financial market infrastructures play because what they do occurs behind the scenes. More often than not, if you’re reading about market infrastructure, it’s because something went wrong. However, since the 2008 financial crisis, market infrastructures — and in particular clearinghouses, which guarantee trade completion in the event of a firm default — have moved center stage and are now recognized as critical entities in mitigating risk, maintaining financial stability and protecting the investing public. In fact, the U.S. Financial Stability Oversight Council, which was established under the Dodd-Frank Act, created a special designation for the most critical market infrastructures. These systemically important financial markets utilities (SIFMUs) received this classification in recognition that “the failure of or a disruption to the functioning of (a financial market utility) could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.”
Three of those clearing organizations are part of our organization’s family of companies, including our centralized clearinghouse for the U.S. equity markets, which handles broker-to-broker equity trades, corporate and municipal debt, and exchange-traded funds, among other responsibilities. These responsibilities were magnified as the COVID-19 pandemic swept across the world. Trading activity flowing through our systems has set record levels four times since mid-March — and on March 12, we set a new single-day record, processing more than 363 million transactions, 15% more than at the height of the 2008 crisis. On average, we are handling nearly three times the normal daily volume. Other clearinghouses and infrastructures are experiencing similar surges, and we expect to see significant volumes continue.
Despite these extraordinary circumstances, financial markets have continued to function smoothly. Thanks to the heightened risk management standards that are required of SIFMUs, including risk-based margin requirements, clearinghouses are well capitalized and able to measure risk exposure, including making adjustments in real time, to protect market stability in the event of a firm failure.
The G20’s statement about “interconnectedness and vulnerabilities” may have been directed at the financial world, but it’s just as true for society at large. When I speak about the role of market infrastructures, I often refer to their significance in “safeguarding the industry” as an entity, but it’s really much more than that. They exist to serve the public interest, and ultimately that means everyone who invests. It’s a point I make as often as possible. In the midst of this crisis, or any other market disruption, infrastructures must provide flawless clearing and settlement, enable seamless trade reporting, and support other critical market functions. We can’t control market swings, but we can protect the integrity of the global financial system — and that is most important when it comes to serving the public interest.
This article was originally published in Forbes Finance Council.