05.05.2022

DTCC Highlights Interconnectedness Risks

05.05.2022
Banks Scale Back Risk

As the nature of risk continues to evolve and black swan events occur with greater frequency, The Depository Trust & Clearing Corporation, the premier post-trade market infrastructure for the global financial services industry, 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.

Source: DTCC

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