DTCC’s new white paper highlights interconnectedness risks that pose
increased contagion threat.
New York/London/Hong Kong/Singapore/Sydney, May 4, 2022 ‒ As the nature of
risk continues to evolve and black swan events occur with greater frequency, The
Depository Trust & Clearing Corporation (DTCC), the premier post-trade market
infrastructure for the global financial services industry, today published a new white
paper highlighting key risks that deserve close attention as firms navigate a global
financial industry that is increasingly intertwined.
The white paper, Interconnectedness Revisited, details a key set of significant recent
developments that require heightened scrutiny among risk managers, including:
- Greater cross-border financial exposures make countries that rely
heavily on foreign capital more vulnerable to systemic shocks.
- New fintech innovations like distributed ledger technology (DLT), and the
growth of cryptocurrencies are becoming increasingly interconnected with
other parts of the financial ecosystem.
- The industry’s increased reliance on third-party vendors and the rise in the
volume and sophistication of cyberattacks exacerbates operational risk
challenges.
- The growing importance of Non-Bank Financial Intermediation (NBFI)
represents yet another channel of risk transmission.
“An interconnected ecosystem is both beneficial and challenging,” said Michael
Leibrock, DTCC Managing Director and Chief Systemic Risk Officer. “While
interconnections can provide firms operational efficiencies and other benefits, it’s
important to recognize that they may also pose certain risks. Given the increasing
complexity of the global financial system, it is more crucial than ever that firms continue
to evolve their approach to managing risk, ensuring they’re taking a holistic,
comprehensive view of all the relevant factors.”
The new paper builds on DTCC’s 2015 whitepaper, Understanding
Interconnectedness Risks. In that paper, DTCC identified the need for risk managers
to view the global financial system as a complex network of interdependent factors,
while noting that the failure of a single, large entity could cause worldwide financial
instability.
The paper also notes that Financial Market Infrastructures (FMIs) face their own set of
unique risk management challenges, especially given that they are interconnected with
the financial ecosystem in various ways. To reduce these risks, DTCC has taken
initiatives including:
- Implementing agreements between DTCC’s clearing agencies and other FMIs
to reduce the risk associated with a common member’s insolvency.
- Establishing a cross-functional initiative to address risks related to
interconnected entities.
- Developing a comprehensive framework to identify, monitor and manage risks
posed by links between clearing agencies, financial market utilities or trading
venues.
“Staying on top of emerging threats requires constant vigilance,” said Adrien Vanderlinden, DTCC Systemic Risk Executive. “Firms should adopt a multi-disciplinary approach that leverages insights from a diverse group of subject matter experts while ensuring close coordination between stakeholders. In support of this, we invite clients, market participants, and members of the industry to share comments and feedback with us to foster collaboration and information sharing, which are critical in a complex risk environment.”
About DTCC
With over 45 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services
industry. From 21 locations around the world, DTCC, through its subsidiaries, automates, centralizes and standardizes
the processing of financial transactions, mitigating risk, increasing transparency and driving efficiency for thousands of
broker/dealers, custodian banks and asset managers. Industry owned and governed, the firm simplifies the complexities
of clearing, settlement, asset servicing, data management, data reporting and information services across asset classes,
bringing increased security and soundness to financial markets. In 2021, DTCC’s subsidiaries processed securities
transactions valued at nearly U.S. $2.4 quadrillion. Its depository provides custody and asset servicing for securities
issues from 177 countries and territories valued at U.S. $87.1 trillion. DTCC’s Global Trade Repository service, through
locally registered, licensed, or approved trade repositories, processes 16 billion messages annually. To learn more,
please visit us at www.dtcc.com or connect with us on LinkedIn, Twitter, YouTube, Facebook, and Instagram.