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COVI 19 Impact on SIFMUs and Global Financial Markets

By DTCC Connection Staff | November 16, 2020

Michael Leibrock, DTCC Managing Director and Head of Counterparty Credit Risk and Systemic Risk, led a panel of industry experts to discuss the prolonged impact of COVID-19 on Systemically Important Financial Market Utilities (SIFMUs) and the financial industry in general.

The Enterprise Risk Management (ERM) panel was hosted by Columbia University, where Leibrock is a part-time lecturer at the school's Master of Science in Enterprise Risk Management program.

Panelists included John Fennell, Chief Risk Officer, Options Clearing Corp., Sharon Haas, Global Head of Resiliency Strategy, Regulatory & Governance, BNY Mellon, David LaFalce, Managing Director, Head of Business Continuity Management, DTCC, and Rajalakshmi Ramanath, Executive Director, JP Morgan Chase.

SIFMU and Central Counterparties (CCPs) play a key role in reducing systemic risk in the financial system, in the view of the regulators and the markets. Leibrock began by asking the panelists to detail the biggest challenge their firm faced at the beginning of the crisis when markets were most volatile.

All panelists agreed that the speed and intensity at which the global pandemic affected the financial markets was the biggest challenge. "We were dealing with the perfect storm—record transaction volume and severe volatility—all while our entire workforce switched to a work-from-home environment," stated one panelist.

A second panelist echoed those comments. "This was like any other natural disaster and spread very quickly, except the prolonged nature of the pandemic forced us to reconsider our processes regarding workforce planning and how to manage teams from a remote basis."

Practical aspects that are typically taken for granted, such as home office space and equipment, the sustainability of internet service providers as well as WIFI bandwidth, needed to be taken into consideration. The typical work protocol changed—instead of walking into a colleague's office to collaborate—employees were required to communicate virtually.

"This was beyond any extended testing we had performed—having about 98% of our employees switch to work from home practically overnight," one panelist stated. "We had to ensure that our employees across the world had the right equipment and the proper connectivity and accessibility. Many didn't have the equipment to work from home for a sustained period. We had to ensure that they received what they needed in a safe and secure manner."

One panelist added that the different controls his firm put in place prior to the pandemic and the established communication plans helped minimize the amount of downtime in the shift to remote working.

LaFalce noted that the financial sector has been planning for a pandemic since 2007 (Pandemic Planning: Interagency Guidance," issued on December 18, 2007 by the Federal Financial Institutions Examination Council). This guidance helped shape the planning and improvement of today's technology providers' infrastructure. "The biggest challenge for DTCC in those first few weeks was operating in a new environment and adapting to the unknown."

Leibrock summed it up, saying, "As risk managers, you don't learn nearly as much in quiet, benign times as you do in challenging environments."

Stability During a Crisis

SIFMUs provide trade guarantees, trade netting, and margin efficiencies to the financial markets. How did DTCC, as a SIFMU, and OCC, as a CCP, continue providing these critical services during the extreme volatility?

From a financial and systemic risk perspective, March and April were periods of unprecedented volume and volatility and introduced new challenges as well. As one panelist explained, "CCPs need to protect confidence in the market, and had to take major steps not to introduce new risks to an environment that was already heightened with volatility, including introducing additional risks, such as procyclicality." Procyclicality, which involves having margin levels that scale up dramatically when volatility increases, would add to the systemic challenges the markets were already experiencing, according to one panelist.

"It was also important to provide uninterrupted services from an operational perspective, including ensuring that our critical vendors were operational and not experiencing any major interruptions.”

Put to the Test

The group agreed that this was the first true stress test for the financial sector since the Financial Crisis of 2008. The work done by the industry and regulators alike, including enhanced standards, increased capital, and liquidity requirements, have contributed to creating a safer, more resilient marketplace. But were these measures sufficient for the for this new crisis?

According to one panelist, two things ensured that a major liquidity event did not happen—the reforms that were done to ensure that member firms were well-capitalized eased pressure, and the amount of liquidity introduced by the central banks shored up confidence. "From a credit perspective, all the work done has paid off. Overall, the market proved to be very resilient, with only a small number of defaults that did not shock the markets."

Further, as one panelist added, while many financial organizations were prepared for an event, it was not for a pandemic scenario. Nonetheless, the planning process worked, as member firms had immediate access to their SIFMUs and this proved invaluable in the very sudden transition to the remote-work dynamic.

In terms of planning, the panelists discussed how their respective firm regularly tests the robustness of the infrastructure through extensive scenario analysis and close-out simulations. These exercises essentially provide an advanced roadmap of how financial market infrastructures (FMIs) will address a range of potential events, including a member failure. "We hope for the best outcomes, but we have to be ready for the worst-case scenarios to materialize."

Adapting to the New Normal

While most individuals in the financial sector were able to work remotely, LaFalce noted that DTCC still has a portion of its workforce that cannot perform their functions remotely. This included the processors, support structure and operations personnel that handle the $70 trillion of paper securities that are still manually processed. "We had to find a way to keep the physical securities services open while maintaining the safety of the staff that supports the vault. This segment of DTCC's business that couldn't work from home," LaFalce stated.

LaFalce added that cybersecurity is now an even bigger concern, given the impact of the remote work situation. In addition, paper and printing have become the new privacy risks, as shredders and ways to safely dispose of documents present new challenges.

"No one is going back to the way we were before," LaFalce said, adding that a hybrid model is highly possible, and many firms are considering leaving their massive footprints and moving toward microsites and embracing hoteling.

Lessons Learned

The group agreed that extreme events such as the pandemic teach us the importance of stress testing, as well as thinking about operational scenarios. "We need to use scenarios to explore vulnerabilities to mitigate risk and enhance resiliency,” noted one speaker.

The panelists agreed that the extensive stress testing that has been done by the industry for the past several years was worth it. Firms need to stay curious and continue to enhance resiliency because as Leibrock concluded, "it's always a matter of when, not if, the next crisis will occur."



Michael Leibrock DTCC Chief Systemic Risk Officer and Head of Counterparty Credit Risk