DTCC has published a white paper outlining the dangers of interlinkage between systemic risks confronting the global finance industry and the threat of contagion that this “interconnectedness” may present.
The paper highlights a series of risks that have become prominent in global financial services and must be under constant scrutiny from risk managers. This includes increased risk of cross-border financial exposures that make countries that are dependent on foreign capital more exposed to systemic shocks. Although by no means a new trend, DTCC indicates that the risk teams must monitor the evolving nature of this threat.
DTCC also identifies vulnerabilities presented by the adoption of new fintech innovations, including distributed ledger technology and the growth of cryptocurrencies, which are increasingly interlinked with other elements of the financial ecosystem.
Additionally, DTCC highlights the rising importance of non-bank financial intermediation (NBFI) as a potential channel of risk transmission, a theme that has attracted close attention in recent times from the Financial Stability Board and other bodies monitoring risk concentrations in the global financial system.
As a fourth factor, the white paper focuses on the industry’s greater reliance on use of third-party service vendors, alongside risks presented by the increase in volume and sophistication of cyberattacks.
This paper, Interconnectedness Revisited, builds on themes addressed in DTCC’s 2015 white paper, Understanding Interconnectedness Risks, which shines a spotlight on dangers of contagion and interconnectedness within the global financial system, highlighting that the failure of a large financial entity could trigger financial instability worldwide.
Inevitably, these risk threats have important implications for global financial infrastructure providers. DTCC outlines a series of steps it is taking as a major global post-trade infrastructure specialist to mitigate these concerns. This includes implementing agreements between DTCC clearing entities and other financial market infrastructure to limit the risk connected with the insolvency of a common member. It also includes developing a rigorous and comprehensive framework to identify and manage risks associated with the interconnectedness of clearing entities, trading venues and financial market utilities.
Reflecting on these issues, DTCC managing director and chief systemic risk officer, Michael Leibrock says: “An interconnected system is both beneficial and challenging. While interconnectedness can provide firms [with] operational inefficiencies and other benefits, it is important to recognise 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 are taking a holistic, comprehensive view of all the relevant factors.”
DTCC systemic risk executive Adrien Vanderlinden adds: “Staying on top of emerging threats requires constant vigilance. Firms should adopt a multidisciplinary 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,” says Vanderlinden.
