The Depository Trust & Clearing Corporation (DTCC) has identified a number of emerging trends that could potentially impact the industry’s ability to protect against new and unidentified threats to the financial system.
The DTCC’s recent white paper, entitled Beyond the Horizon: A White Paper to the Industry on Systemic Risk, reports that despite progress over the past five years, systemic risks facing the global financial services industry are growing in complexity, are more difficult to anticipate and that new gaps continue to surface.
These potential threats include a rise in cyber-attacks that can easily thwart US and EU industry safeguards and laws; a potential shortage of high quality collateral in the future; and regulatory safeguards that are either years from implementation or introduce new forms of systemic risk.
“History has shown time and time again that financial crises and other major risk events can occur with little notice and have a significant impact on the securities industry and real economy,” says Noel Donohoe, DTCC’s group chief risk officer. “Despite the positive results of risk mitigation efforts by the financial industry since the 2008 crisis, we urge continued vigilance and focus on systemic risks, especially given the growing interconnections and interdependencies in global markets.”
The white paper, which builds on DTCC’s recent Systemic Risk Survey results, provides an overview of the key systemic risks facing the global securities industry, outlines DTCC’s role in systemic risk monitoring and mitigation and includes the latest US and European regulatory actions designed to mitigate such risks.
Cyber security: This issue has emerged as arguably the top systemic threat facing global financial markets and associated infrastructures, including the threat of Distributed Denial of Service attacks, attacks against systems containing transaction records, and risk of disclosure of restricted, confidential or material non-public Information via compromise of internal systems.
Impact of new regulations: The financial industry has expressed concerns that even though the regulations are well-intentioned and necessary, there is a danger that their scope and complexity may actually be creating unintended consequences or an entirely new set of risks.
Counterparty risk: There is still ongoing industry debate as to whether the “too-big-to fail” issue has been sufficiently resolved. Today, the top US banks still control the vast majority of total assets within the sector and just a few provide some of the most critical services.
Collateral risk: There is growing concerns globally about potential risks associated with a future shortage of high quality collateral, possible pro-cyclical impacts of collateral requirements, along with operational challenges related to collateral management.
Interconnectedness risk: Inter-linkages among financial firms and infrastructures greatly improve the effectiveness and efficiency of clearance and settlement activities and processes. They also create a complex network of interdependent legal, credit, liquidity, and operational risks. This presents a possible source of systemic risk by increasing the potential for operational and other disruptions to spread quickly and widely through the financial system in a worst-case scenario.
DTCC is calling for closer and more continuous engagement and action among all key industry participants on this issue to reduce the systemic risks facing global markets.
“The paper is intended to initiate robust dialogue and help market participants gain a deeper understanding of how new or evolving systemic risks might impact the safety and soundness of global financial markets, and the steps the industry needs to take to be ready for the next crisis,” says Mike Leibrock, DTCC vice president, systemic risk.