New Paper Identifies Post-Crisis Opportunities To Further Strengthen Global Financial Stability & Resiliency

While the stability and resiliency of the global financial marketplace has improved significantly since the 2008 crisis, a new white paper published  by The Depository Trust & Clearing Corporation (DTCC) identifies key risks facing the industry and opportunities to mitigate them to help protect market stability.

In its latest white paper, The Next Crisis will be Different: Opportunities to Continue Enhancing Financial Stability 10 Years after Lehman’s Insolvency, DTCC identifies a series of actions to tackle new challenges that have emerged related to the macroeconomic environment, market-related risks and the advent of new technologies, including:

  • Expanding central clearing for both cash and derivatives markets to more fully take advantage of the risk management benefits provided by central counterparties.
  • Boosting regulatory harmonization and cooperation among all stakeholders to harness the full potential of derivatives trade repositories as early warning signals for systemic risk buildups.
  • Improving risk transparency by globally mandating the use of Legal Entity Identifiers (LEIs) in regulatory reporting.
  • Further optimizing and accelerating the US equity settlement cycle beyond T+2 to further reduce the exposure associated with unsettled trades.
  • Ensuring that enterprise data management capabilities become foundational to financial firms’ risk management frameworks.

“The risk landscape has experienced a significant evolution over the last decade, which has led to a more resilient and stable global financial ecosystem,” said Andrew Gray, DTCC Managing Director and Group Chief Risk Officer. “However, additional work is required to fully address some of the vulnerabilities that triggered the financial crisis as well as to tackle new risks that have surfaced over the past decade.”

“We must maintain a forward-looking approach to identifying and anticipating threats and developing solutions to reduce them, which could help prevent or mitigate another crisis,” he added.

New Risks Could Jeopardize Market Stability

Comparing the risk landscape 10 years ago with today’s threats, DTCC calls for a holistic approach to addressing an ever-widening array of interconnected risks. The paper also highlights concerns regarding the exposure associated with the proliferation and increasingly esoteric nature of certain exchange traded funds (ETFs) and advises that these risks should be managed more closely to match their specific risk profiles. It goes on to warn that cybersecurity concerns, while not new, have grown to a point where they may have become the most important near-term threat to financial stability – adding that resilience and recovery capabilities must be emphasized as much as prevention efforts, and reiterating the importance of increased public-private partnerships, as well as continued industry-wide simulation exercises. Finally, the paper suggests that while fintech developments are not a source of systemic risk at this point, they should be carefully monitored and thoughtfully supervised to balance the associated risks and rewards.

“Despite the many enhancements that have been implemented over the past 10 years, the nature of risk has evolved dramatically since 2008. Some of the most dangerous and challenging risks we face today barely registered a decade ago, and the next crisis might be fundamentally different than we can envision right now,” said Michael Leibrock, DTCC Managing Director, Credit and Systemic Risk. “In response, the risk management function must continue to evolve.”

Adrien Vanderlinden, DTCC Systemic Risk Executive, added, “Recognizing that ‘fighting the last war’ won’t adequately prepare us for the next crisis, we have developed this paper to raise awareness of key risks facing the industry and have provided a series of forward-looking opportunities to help strengthen financial stability for the future.”

To download the full white paper, please click here.