Technology has facilitated many benefits across the financial services landscape, including the speed of processing and efficiency. However, emerging technologies have also introduced new threats to the industry.
In November, I joined a virtual panel discussion during the Singapore Fintech Festival 2021 on the emerging risks stemming from the increased use of technologies and how multi-stakeholder cooperation can mitigate these risks. We discussed key takeaways from the World Economic Forum’s recent report, Beneath the Surface: Technology-driven systemic risks and the continued need for innovation, which explores the relationship between increased technology adoption and the potential shock of cascading risk factors. I sat on a Working Group of approximately 200 senior leaders from financial services, technology firms, academia and the public sector who engaged in a series of global workshops and interviews over the past year to inform the findings of the paper.
Fellow panel members included Dr. Ren Zhang, Director, Head of Data Science, Worldwide Selling Partner Development, Amazon; Vincent Loy, Assistant Managing Director, Monetary Authority of Singapore; and Drew Propson, Head of Technology and Innovation in Financial Services, World Economic Forum, who served as moderator.
Here’s a summary of the key takeaways from our discussion.
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Technology-Driven Risks in Financial Services Today
Enhanced processing speed is one of the many benefits made possible by technology in financial services, although this innovation also has the potential to propagate errors more rapidly throughout the industry. The risks of high-speed processing are not new. In 2012, Knight Capital rolled out a high-frequency trading algorithm that executed a series of automatic trades in less than an hour that were supposed to be spread out over days, which nearly resulted in the firm’s bankruptcy.
Similarly, the application of artificial intelligence (AI) has many positives, uncovering hidden correlations and generating superior results across credit or market analysis. However, AI can also create decision-making algorithms that may lack the necessary transparency, raising fundamental questions about reliability and accountability.
Dr. Zhang noted that as regulators monitor the risks of AI, there is the potential to do too much or too little, as witnessed by the AI Act proposed by the European Union, which could hinder innovation. What’s more, regulators need to properly balance the need for boundaries with the ability to take advantage of emerging technologies.
Developing Risks Across the Ecosystem
Recent surges in cyberattacks, as well as ransomware and data breaches, pose a substantial risk for industry-wide disruptions. Among DTCC member firms, cyber risk is commonly cited as a top risk, and the increased sophistication of bad actors makes more attacks inevitable in the short term.
There are also broad concerns across the ecosystem of inflation risks. Record debt levels stretched asset evaluations and supply-chain issues are all interrelated and could have a knock-on effect over the next six-to-12 months on the broader economies.
The impact of globalization is also something to watch, Dr. Zhang noted. Many economies were moving toward globalization pre-Covid, but the pandemic and resulting supply-chains issues reversed some of these gains. Questions remain if countries will continue to embrace globalization or contract, and either way, this will have a huge impact on risks.
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Public and Private Collaboration Is Key
Growing risks across the financial ecosystem highlight the tremendous opportunity that the collaboration between the public and private sectors can offer. DTCC welcomes a more coordinated international regulatory approach to face the transcending global challenges arising from the proliferation of cyberattacks. There are many opportunities to collaborate within the industry that DTCC employs, including frequent meetings with risk executives, roundtable events and tabletop exercises.
DTCC considers technology and cyber risk equally important as other significant market risks, including credit, market and liquidity. The firm employs a holistic risk management approach through internal collaboration and information sharing to identify and make key stakeholders aware of emerging risks. One cross-functional approach is the Systemic Risk Council that meets regularly with business heads to discuss and prioritize emerging risks across the globe.
As a critical financial market infrastructure, DTCC continuously evolves its risk management framework in close collaboration with members and regulators, with a detailed recovery and wind-down plan in place. DTCC keeps a view on the horizon to evaluate events that could impact the firm or markets more broadly, engaging in ongoing dialogue with other central counterparties to discuss common issues, potential risks and the ongoing evolution of key interconnections and how they play into systemic risk. Another key initiative is the firm’s interconnectedness risk program, a way to identify the key relationships with members and critical service providers, another form of systemic risk.
Emerging technology has the potential to advance mitigation, and DTCC continues to research AI / ML use cases in the central counterparty risk area to monitor members and their financial situations on a real-time basis. More broadly, DTCC is working closely with the industry to use DLT to accelerate the securities settlement process as well as credit default swap tracking, looking for ways to leverage this innovative technology for efficiency across the industry.