Systemic Risk on Industry Radar04.11.2014
Systemic risk protection is becoming embedded in standard risk practices, as companies increase their spending on systemic risk mitigation.
According to the DTCC Risk Barometer, a survey conducted by Depository Trust & Clearing Corp. to assess trends in the financial industry’s resilience, 70% of respondents reported that their firms had committed more resources into systemic risk management activities over the past 12 months. At the same time, only 9% of respondents said they believed the occurrence of a high-impact market event in the next year to be likely, down from 37% the year before.
The Barometer analyzed information provided by 218 respondents—up from 80 the year before—comprising DTCC clients including broker/dealers, banks, service bureaus, mutual funds, hedge funds and insurance companies.
“One of the main points that came out of the survey is that just nine percent of the respondents this year considered a systemic event in the next twelve months to be a likely occurrence, versus thirty-seven percent last year,” said Mike Leibrock, DTCC’s chief systemic risk officer. “That is a pretty significant drop in just twelve months, and reflects that the industry is feeling better about the economic climate, in the U.S. and Europe, and about some of the progress that has been made in shoring up the banking sector.”
What is also interesting, Leibrock noted, is that 70% of firms indicated that, over the past twelve months, they have significantly increased their spending on systemic risk mitigation.
“While firms feel more optimistic that there is no imminent threat on the horizon, nonetheless they are being more proactive in building up their infrastructures and making sure they have prudent risk management on these issues,” he said. “This is unlike in prior crises in history where we have sometimes seen a risk of complacency set in as we moved further away from a crisis.”
The Risk Barometer asked firms to characterize their ability to assess and mitigate standard risks. Sixty three percent classified their firm’s capacity in this area as developing, and only 30% as mature. “It would seem to indicate that firms are changing the way they think about and manage systemic risks, despite the fact that they may be less concerned today than a year ago,” Leibrock said.
The Committee on Payment and Settlement Systems of the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) are engaged in formulating standards to harmonize and strengthen the existing international standards for FMIs.
FMIs include payment systems, central securities depositories, central counterparties, securities settlement systems, and trade repositories.
In the U.S., examples of FMIs include DTCC, The Options Clearing Corporation (OCC), and the Federal Reserve, which operates interbank payment systems.
CPSS-IOSCO released a final report containing principles for financial market infrastructures in 2012. CPSS-IOSCO noted that its members would strive to adopt the new standards by the end of 2012 and that it expects FMIs to observe them as soon as possible.
“We are in the process right now of doing self-assessment against those principles, and later this year we will be making public where we stand versus those principles,” Leibrock said.
Featured image via DPC
The suite enables GAM to seamlessly manage market risk exposure and liquidity and investment risk.
The clearinghouses will be using a VaR methodology.
The enhanced margining model strengthens resilience and boosts capital efficiency.
Risk management and capital efficiency are becoming more important for institutions in crypto.
Hedging remains highly effective despite recent volatility.