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by Philip Ballard

Systemic risk management has become an integral part of DTCC’s overall risk management strategy—a focus that aligns with the emphasis the industry places on systemic risk identification, analysis and avoidance today.

Systemic threats are viewed as those with the potential to have a severe and widespread impact on the global economy. The industry and regulators’ heightened concern about systemic risk was sparked by the 2008 credit crisis. “One lesson we clearly learned from the financial crisis is that the identification of potential systemic threats must be part of the risk equation for all market participants, especially for DTCC and the members we serve,” said Walter Stewart, DTCC Vice President of Operational and Systemic Risk. “We must also view systemic threats differently from the traditional family of risks because a systemic threat has the potential to ripple across, and impact, the entire global financial system.”

Leibrock MichaelMichael Leibrock, DTCC Vice President, Systemic Risk

Expanded view

Historically, DTCC viewed risk management in terms of credit, market, operational, liquidity, strategic, compliance, legal and reputational risks. Over the past several years, the company has expanded its risk management capabilities by building a team dedicated to identifying, monitoring and containing potential systemic risk threats to DTCC and the markets.

“Following the credit crisis, DTCC, the industry and regulators recognized the pivotal role the company plays in crisis situations,” says Michael Leibrock, DTCC Vice President, Systemic Risk. “Several years before three DTCC subsidiaries were officially designated as Systemically Important Financial Market Utilities, or SIFMUs, the company had the foresight to create a dedicated focus on systemic risk. By taking a proactive approach to systemic risk identification, our goal is to either avoid or significantly reduce systemic repercussions in the markets.”

Five pillars

In 2009, the DTCC Board of Directors adopted a Risk Policy Statement and created a new systemic risk function, whose main objectives are:

  • Evaluate threats to systemic stability that may arise as a result of DTCC’s ordinary course of activities, assess the costs and benefits of potential means of addressing such threats and, where appropriate, develop strategies to mitigate these threats.
  • Assess the impact of threats to systemic stability that may arise as a result of DTCC’s actions in responding to an extraordinary market event (e.g., the failure of a member firm), assess the costs and benefits of potential means of addressing these effects and, where appropriate, develop strategies to mitigate these threats.
  • Understand the threats to and impact on systemic stability that may arise from DTCC’s interconnections with other entities (e.g., infrastructures, clearing organizations) and seek opportunities to mitigate, as appropriate, the risks arising from such interconnections.
  • Provide educational resources for members and stakeholders to increase their understanding of DTCC’s operations and processes as they relate to DTCC’s risk management and mitigation activities.
  • Assess and understand the impact and potential beneficial or adverse effects on systemic stability resulting from the implementation of proposed new products, services or business initiatives.

Thought leadership

DTCC published a comprehensive white paper on systemic risk for its members in September 2011. The white paper covered potential systemic threats to DTCC and its membership which included, among other issues, liquidity and concentration risks, market structure issues, and geopolitical and legal risks.

As a result of the paper and industry discussions around it, DTCC initiated approximately 100 new and distinct internal projects aimed at addressing or reducing systemic risks, the vast majority of which have been completed to date. “Over the past two years the amount of work completed by project owners across the company to address the original set of risks was tremendous,” says Leibrock. “However, given the dynamic nature of the securities markets and related systemic threats, there is still much work to be done by the industry.”

In 2013, DTCC will publish an updated systemic risk white paper that will brief the industry on the status of some key risks raised in the last version, and will also highlight new or emerging systemic threats. To help inform the forthcoming white paper, DTCC has increased its engagement with members domestically, as well as with international regulators such as U.K. authorities, Bank of England, Bank of France and the European Commission. DTCC also conducted a systemic risk survey of its members (the results of which will be published in a future article).

Strengthening the framework

In early 2012, DTCC merged the Systemic Risk team into its Operational Risk Management group to take advantage of synergies between the two functions. For instance, the Systemic and Operational risk teams now work hand-in-hand to analyze operational risk incidents that might have systemic implications.

Another significant development in 2012 was the creation of a new Systemic Risk Council, a cross-functional advisory group comprising senior executives from key areas within DTCC. “This Council provides advice on the prioritization of potential systemic threats and ongoing risk projects. In addition, members raise and discuss any emerging risks originating from their respective areas of responsibility,” says Leibrock. The Council meets quarterly but may be convened at any time by one of the members to address an urgent systemic threat.

Ahead of the next crisis

“History has shown that decisions made during calm market periods often plant the seeds for the next crisis,” said Leibrock. “DTCC and its partners in the securities industry must remain vigilant about potential systemic threats to increase our collective resiliency and to protect markets and investors around the world.”