The Depository Trust & Clearing Corporation (DTCC) is out with a report warning about the interconnected risks of the global financial industry. As if we didn’t need something else to cause concern, DTCC says the nature of these risks continues to evolve occurring with greater frequency.
As DTCC processes securities transactions representing a mere $2.4 quadrillion each year, the group has unique access into some of these concerns.
So beyond war, plague, and economic duress – like inflation, DTCC’s white paper, entitled Interconnectedness Revisited, highlights 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 exacerbate operational risk challenges.
- The growing importance of Non-Bank Financial Intermediation (NBFI) represents yet another channel of risk transmission.
Michael Leibrock, DTCC Managing Director and Chief Systemic Risk Officer, stated:
“An interconnected ecosystem is both beneficial and challenging. 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.”
This most recent paper is a follow-up to Understanding Interconnectedness Risks which was published in 2015 – a lifetime ago during a heightened pace of innovation and connectivity.
To reduce these risks, DTCC reports that it 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.
If you are interested, the paper is available below.
