As the technology that underpins the global financial services evolves and improves, so does our industry’s dependence on it. With more reliance on automation and speed, the markets become more exposed to risk when the technology goes awry. Vulnerabilities from these unforeseen risks, such as errant algorithms, technology glitches, cyber-attacks, market volatility and even rogue traders, can have a devastating – and cascading – effect on our interconnected financial services industry.
By providing additional, risk controls, we believe the industry can be more confident about its ability to proactively prevent significant incidents from occurring -- and no longer rely on actions that minimize or limit the effects on the entire industry after an incident has occurred.
Market Structure Risk Controls: An Industry Report discusses some of these incidents and highlights the progress our industry has made over the past decade to improve market risk controls, including the first phase of the pre-trade risk controls implemented by the New York Stock Exchange (NYSE), the Chicago Board Options Exchange (CBOE) and NASDAQ in 2020.
We hope to utilize the momentum gained in 2020 to accelerate the industry discussion on further enhancing market risk controls. Our three primary recommendations outlined in our industry report include:
- Establish limits at individual self-regulatory organizations (SROs) that track the “Peak Net Notional Exposure” for each individual participant member firm, which would allow limits to be placed on overall and/or categories of activity.
- Develop additional quantitative controls to better detect abnormal trading behavior in real-time.
- Evaluate whether a longer-term consolidated control mechanism should be built at DTCC’s clearing agency subsidiaries.
This industry report includes a second phase of potential, additional features as a natural expansion to continue improving the controls put in place in 2020.
Making progress on these recommendations will require strong support from industry organizations and implementing effective controls will require committed adoption by all stakeholders, including trading firms, market participants, exchanges and DTCC, as well as support from regulators.
We encourage you to read our industry report, share your thoughts and participate in the ongoing dialogue that we are looking to foster.