DTCC Connection

Aug 11, 2016 • DTCC Connection

DTCC Systemic Risk Barometer Fuels Industry Engagement

By Joseph King

DTCC Systemic Risk Barometer Fuels Industry Engagement
Michael Leibrock, DTCC Managing Director and Chief Systemic Risk Officer

For more than 40 years, The Depository Trust & Clearing Corporation (DTCC) has delivered innovative solutions designed to identify, measure, monitor and control credit, market, liquidity, systemic, operational and other risks for the global financial marketplace.

One valuable tool DTCC uses to identify current and emerging risks in the marketplace is its Systemic Risk Barometer survey. DTCC has been conducting the bi-annual Systemic Risk Barometer Survey since 2013 with clients and other stakeholders, including regulators, across the global financial services industry.

RELATED: Q1 2016 DTCC Risk Barometer

Macroeconomic issues earned top billing for the first time in the Q1 2016 survey. Concern about a China slowdown saw a huge run-up, as 22% named it their top risk concern, up from just 1% in the Q3 2015 survey. “We’re not surprised to see an increase in concerns about the global economy, especially in Asia where we have seen the economy slow down in China sharply in recent years compared to three decades of mostly double digit growth,” said Michael Leibrock, DTCC Managing Director and Chief Systemic Risk Officer.

The survey is part of DTCC’s Risk Office’s multi-pronged risk management approach to engaging with the industry about systemic risk. “The survey helps us gain insight into the key systemic risks from a broad constituency of industry stakeholders,” said Leibrock. “One of the primary values of the survey is not just the results -- it’s the interaction that we have with clients as a follow up. We use the results of the survey to engage with the industry and find ways to mitigate risks.”

One forum Leibrock and his team use to discuss the survey’s results is DTCC’s Systemic Risk Roundtable. The Roundtable is designed to be an informal discussion among interested members about risk. Leibrock said the roundtables have proven to be popular and exceeded his expectations in terms of turnout - generally around 25 to 30 firms participate and the discussion is both interactive and robust among senior risk managers. Meetings with the DTCC Risk Advisory Council are another sounding board for insights.

Indeed, the exchange of ideas with clients plays an important role in the evolution of the Risk Barometer survey. Leibrock and his team conduct a post-survey review and go through individual comments to identify suggestions on ways to enhance future surveys. Feedback from the survey and external forums has led to some changes, according to Leibrock. For example, he noted that market liquidity was added to the survey as a distinct risk category based on industry feedback.

In general, however, the survey has not undergone extensive changes since its inception. That has allowed Leibrock and his team to identify trends in the results and adapt where necessary. For example, based on feedback, the concern about Britain leaving the European Union (Brexit) was added to the list of risks in the most recent (Q1 2016) survey.

Tracking Emerging Risks

While the 2008 financial crisis wasn’t a direct driver behind the creation of the survey, it certainly played a role, Leibrock said. “They survey is about being proactive about risks that caused the crisis,” he said. “It provides the industry with a view of what risks we and other stakeholders see ahead so we can react and not be caught of guard.”

DTCC Risk Office Partners with Industry

The Risk Advisory Council
The Risk Advisory Council (RAC) is comprised of senior risk management professionals from a subset of DTCC’s member firms. It meets quarterly to provide feedback and input on emerging and developing risk management issues, as well as on DTCC’s risk management policies. The RAC is invitation-only and participants are bound by a confidentiality agreement.

The Systemic Risk Roundtable
The Systemic Risk Roundtable was created in mid-2015 as a forum to informally exchange ideas among risk management professionals from DTCC’s members. Membership and participation within this group has expanded since its inception. The Systemic Risk Roundtable meets on a quarterly basis.

One of those risks DTCC is proactively tracking is interconnectedness. In its white paper, Understanding Interconnectedness Risks, DTCC explains that the discipline of risk management has become more complex and diverse than ever, driven in large part by new regulatory mandates, an explosion of technological and financial innovation and the growing interconnectedness of global markets. In this new paradigm, risk managers can no longer view financial firms as stand-alone entities because, in reality, they are now a diverse set of interconnected components that distribute risk and are exposed to it, oftentimes in ways that are not transparent or expected.

Interconnected risk is global. That’s why the Systemic Risk Roundtable has a U.S. and a European component. At the Systemic Risk Roundtable event held in February in Paris, interconnectedness was a hot topic of discussion. “Risks are global and to get a true picture of everyone’s views in the industry we cannot just look to the U.S.,” Leibrock said. “We’ll be doing more engagement overseas in Europe and Asia including meeting with regulators to discuss risk from a global viewpoint.”

Recent Barometer results demonstrate that interconnectedness risk is a growing concern among industry participants. The Q1 2016 Barometer found that 16% of respondents identified interconnectedness as a top 5 risk. The Q1 2015 survey found that just 10% were of the same opinion. “We’ve ramped up our efforts engaging with members and regulators on the issue of interconnectedness because we see it as one of the top emerging risks to the financial industry,” Leibrock said.

Evolution of Systemic Risk

Over the past several years, DTCC 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.

“Five years ago we often heard comments such as there’s nothing you can do about systemic risk,” Leibrock said. “But now we are seeing the majority of firms in our industry taking a much more organized and comprehensive approach to systemic risk identification and monitoring than in the past. Firms realize we cannot ignore these risks or history is bound to repeat itself. Overall there has been a significant paradigm shift around systemic risk in the past five years.”

That paradigm shift in firms’ view of systemic risk is reflected in survey participation. The response rate to the survey has increased steadily since the survey began, according to Leibrock. “The steady increase in the number of responses shows just how important systemic risk has become to the industry,” he said. “We see the results from the Risk Barometer covered extensively by the media and more and more stakeholders are referring to our survey results in their work.”

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