Survey Polls Industry Leaders on Biggest Challenges to Mitigating Risk
The impact of new regulations in the financial services industry is by far the most important systemic-risk concern facing the global capital markets, according to a recent client survey conducted by The Depository Trust & Clearing Corporation (DTCC). The survey revealed that 82% of industry leaders ranked meeting new regulatory requirements as a top concern in mitigating systemic risks.
“Given the massive scope of Dodd-Frank, CPSS IOSCO, Basel III and other new or enhanced regulations, the tremendous commitment of time and resources necessary to build and maintain compliance structures is clearly keeping people up at night,” said DTCC’s Michael Leibrock, Vice President, Operational & Systemic Risk Management, who cited comments received by respondents to the survey. “The findings suggest that if execution of regulatory mandates is done poorly, that could actually create risks which supervisors are trying to avoid, including the potential failure of a firm as a worst-case scenario,”
Top Ten Risks
DTCC’s survey ranked the following ten issues in this order of importance to its clients. In two cases, there were ties.
| Top Ten Risks | Response % | Commentary by DTCC Clients |
|---|---|---|
| 1.Impact of New Regulations | 82% | The time and resources required to meet new regulators could result in companies “taking their eye off the ball” from managing day-to-day risk. |
| 2. Disruption or Failure of a Key Market Participant | 61% | The “too big to fail” issue is still a concern as the interconnected nature of the financial system could cause a domino effect if one major player fails. |
| 3. Cyber Security | 53% | Small firms with limited resources for IT departments or constant technology upgrades are considered the weakest link in combating cyber threats. |
| 4. Significant Business Continuity Event | 45% | Unpredictable events such as natural disasters and terrorist acts, as well as more predictable events such as extreme weather, are both of considerable concern. |
| 5. Sudden Dislocation in Stock or Bond Market | 37% | With yields on most bonds at or near historical lows, there is a significant risk that even a modest increase in yields could result in massive losses in the fixed income markets. |
| 6. U.S. Recession | 37% | The ability of the U.S. government to address the deficit and the cumulative effects of heavy regulations are concerns. |
| 7. Partial or Full Eurozone Breakup | 35% | The over-leveraged nature of certain Eurozone countries and lack of fiscal/monetary integration across the region, could lead to a forced or voluntary exit of one or more members. |
| 8. Major Compliance or Governance Event | 35% | Respondents note a troubling trend in compliance violations by large financial institutions.9. Interconnection Risks25%Increasing linkages among global financial firms, combined with the high speed of transactions, is a cause for concern.10. High-Frequency Trading18%Faster trading and algorithmic trading could lead to future anomalies in the securities markets. |
| 9. Interconnection Risks | 25% | Increasing linkages among global financial firms, combined with the high speed of transactions, is a cause for concern. |
| 10. High-Frequency Trading | 18% | Faster trading and algorithmic trading could lead to future anomalies in the securities markets. |
Of the 80 institutions that responded to the survey, banks and broker/dealers comprised the majority.
DTCC’s Role as Risk Mitigator
With 40 years of experience providing custody, netting, clearing and settlement services to the financial community, DTCC is the world’s largest post-trade processing infrastructure. In July 2012, three of its subsidiaries were designated Systemically Important Financial Market Utilities* by the Financial Stability Oversight Council. Because of its designation and central role as a risk mitigator for the financial markets, DTCC has an inherent interest in keeping a pulse on its clients’ positions on risk.
“The cooperative nature of our relationships with all our constituents has given us unparalleled insights into their needs. As a result, we have been able to develop many pioneering tools to manage risk across a broad range of financial instruments and market sectors,” said Noel Donohoe, DTCC Group Chief Risk Officer.
Among those tools are:
A Mortgage-Backed Securities (MBS) Central Counterparty to reduce risk and costs in the $100-trillion-a-year U.S. market for MBS.
Expansion of the Global Trade Repository infrastructure worldwide and by asset class to support reporting requirements for over-the-counter (OTC) derivatives.
The CFTC Interim Compliant Identifier (CICI) Utility to support OTC derivatives reporting requirements.
In addition, DTCC has provided the industry with proposals to:
Shorten the settlement cycle for U.S. cash securities transactions to mitigate counterparty risk, reduce costs and optimize capital.
Continue reducing and eventually eliminate the remaining physical securities certificates in the U.S. to reduce risk and costs, and boost efficiencies.
Establish a common infrastructure to provide certain middle office processes that support the front and back offices to reduce costs and operational risk for financial institutions and advance straight-through processing.
Introduce a global straight-through margin processing utility for over-the-counter (OTC) bilateral and cleared derivatives trades in response to significant changes resulting from regulatory, industry and market drivers.
* Being designated a Systemically Important Financial Market Utility means a company is required to meet prescribed risk-management standards and heightened oversight by the relevant US regulatory authorities. Systemic risks are generally defined as developments that threaten the stability of the financial system as a whole and consequently the broader economy.
