Risk management is a core DTCC capability and has been since the organization's inception 50 years ago. Events in recent years underscore how the risk landscape is marked by an evolving array of threats that require DTCC to continuously rethink the way in which the organization and the industry at large respond.
With financial regulatory reform accelerating throughout the world, DTCC works with supervisors globally to develop and maintain new and heightened risk requirements for financial infrastructures, such as central counterparties and trade repositories. In 2023, DTCC will continue to engage with clients, financial authorities, government agencies and other key stakeholders to advance opportunities to share best practices and partner on ways to mitigate systemic risk.
DTCC Connection caught up with Michael Leibrock, DTCC Chief Systemic Risk Officer and Head of Counterparty Credit Risk, who weighed in on three key areas of focus for DTCC in 2023.
Background: We operate in an interconnected global financial marketplace driven by technological transformation. As our industry continues to evolve, the interconnectedness risk landscape has changed rapidly leading to dramatic shifts in the risk threats to be addressed.
Related: Interconnectedness Revisited White Paper
Issue: While interconnections can provide firms with a wide range of operational efficiencies and other benefits, it’s important to recognize that they may also pose certain risks. Broadly speaking, analyzing interconnectedness risks is important for at least three key reasons:
The identification of connections and linkages uncovers dependencies that may not be immediately apparent, which helps us better understand how risks can be transferred between entities and how they can spread across the global financial system.
Interconnectedness analysis provides greater insight into critical thresholds and tipping points, given that networks are capable of absorbing shocks up to a certain level, while they tend to spread (or amplify) losses beyond a critical threshold.
The analysis of interconnections and networks highlights the importance of concentration risk and substitutability as two key factors in assessing potential system-wide vulnerabilities.
2023 Outlook: DTCC’s Systemic Risk Office will continue to reassess and re-prioritize the current landscape of interconnected risks, both direct and indirect, and conduct enhanced analysis throughout the year, such as with respect to:
Potential for contagion between crypto-asset-related markets and traditional financial markets
Potential for contagion resulting from the non-bank financial intermediation (NBFI) sector
Potential risks related to third- and fourth-party providers with respect to interconnected entities for the DTCC Clearing Agencies
Climate-Related Financial Risk
Background: Climate change is expected to have a dramatic impact on our environment over the next few decades – and quite possibly beyond. Climate change is no longer being considered primarily an environmental issue, but a multi-faceted source of economic and financial risks that could threaten the stability of the financial ecosystem.
Related: Climate-Related Financial Risk White Paper
Issue: Damages caused by climate-related events have grown to about $133 billion per year in the U.S. alone. Not taking any action to reduce the effects of climate change will likely lead to increased acute and chronic climate-related physical risks to the global economy. Additionally, the market values of firms in some heavily polluting industries may be impacted by policy measures and market trends related to a transition to a low-carbon economy. Regulators and policymakers are increasingly focused on the potential impact of climate change on the financial services sector and they want to ensure that financial firms take adequate and timely action to address climate-related physical and transition risks.
While financial institutions and FMIs are directly exposed to physical risks such as floods, hurricanes, etc., both sectors have time-tested business continuity frameworks in place to address these risks. Meanwhile financial institutions are mostly indirectly exposed to climate-related transition risk (through their financing activities of specific carbon-intensive companies) and therefore FMIs exposure to such risks through the financial sector is even more indirect. This third-order exposure of FMIs to climate-related transition risk is well within the current boundaries of existing FMI risk management models and frameworks.
2023 Outlook: DTCC’s Systemic Risk Office will continue to closely monitor global policy developments and are actively engaging with key stakeholders from the industry and global regulatory community to discuss the February 2023 systemic risk white paper on this topic.
Drive Engagement with Key External Stakeholders
Background: DTCC’s Systemic Risk Office contributes to strengthening the industry’s recognition of DTCC as a thought leader in the area of systemic risk through its publication of systemic risk white papers and systemic risk barometer surveys as well as its regular engagement with a wide range of key external stakeholders.
Issue: Promoting greater transparency, awareness, collaboration and information sharing on systemic risk issues with key external stakeholders enables DTCC and its Systemic Risk Office to more effectively monitor existing and emerging risks that may impact the safety, resiliency and stability of the global financial system.
2023 Outlook: DTCC’s Systemic Risk Office will continue to organize, support and execute external outreach initiatives with clients through the Systemic Risk Roundtable meetings, the Risk Advisory Council, the FMI Forum and the Annual Client Risk Forum. DTCC will also continue to strengthen communication and outreach with international and domestic regulators to encourage a two-way dialogue on key risk and regulatory initiatives.