With the coronavirus continuing to spread around the world and the markets experiencing unprecedented volatility and volumes, Tim Cuddihy speaks on the role that DTCC plays in safeguarding the markets and how it manages risk, each and every day.
Q: The coronavirus has significantly impacted the markets. How do you prepare for such an event?
Risk management and protecting the financial markets are at the center of what we do. As Systemically-Important Financial Market Utilities (SIFMUs), our three clearing agencies are required by law to meet heightened risk management standards to reduce systemic risk and support the stability of the broader financial system. In fact, each day, our team identifies, measures, monitors and controls credit, market, liquidity, systemic, operational and other risks to DTCC, our clients and the marketplace. We have developed robust plans and methodologies that address these changing market conditions.
Q. Can you share some of these plans and how you’ve prepared for this type of disruptive event?
When thinking specifically about the current environment we are in, two things come to mind: first, ensuring our systems can support the significant volumes we are seeing in the markets today and second, making sure our staff is in the best position possible to carry out their roles and ensure normal business operations.
On the first point, DTCC plans and regularly exercises for high volatility and high volume events. These exercises happen periodically for both of our central counterparties, NSCC and FICC, as well as other products and services. What is different now is the scale of the event – the market moves are very large, persistent, and impact multiple asset classes. As a result, we have enhanced our intraday portfolio monitoring to actively address the risk that we’re seeing in current markets, as clearing portfolios have been changing dynamically and sometimes dramatically as news hits the markets.
On the second point, our employees are our greatest assets. We have robust business continuity plans that consider scenarios such as a pandemic, and they include plans for distributed operations and remote working capabilities. These activities were planned well in advance of the current crisis, and have been regularly exercised over the course of many years, so that our staff are best placed to support market needs.
In just one month, DTCC has seen:
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Equity market price volatility increase by 2.5 times. As a result, margin requirements need to account for the increase, as well as any changes that are due to market price changes from the time a trade is compared to when it is ultimately settled.
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Margin requirements increase to a peak of 3-4 times what we saw earlier this year. While these are large increases, the additional collateral called by CCPs is a fraction of the money the public sector is injecting into the economy.
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NSCC’s multilateral netting function compress $2.5 trillion in transactions by 98.3% to $45.4 billion, preserving a significant amount of liquidity in the marketplace and increasing market efficiency.
Q. We’ve talked about technology and your risk management approach. How do you protect the markets from a potential member default?
Because of the extreme volatility in the markets across nearly every asset class, we have had to increase margin calls to protect the industry and our member firms against the risk of a default. This margin collateral protects against the risk of market losses if a defaulting member’s portfolio must be liquidated in markets with higher price volatility.
Q. How does DTCC determine the value of margin calls?
Our CCPs employ margin methodologies that enable us to determine the potential market value changes of each client’s clearing portfolio based on historical price movements. The margin we collect must cover that risk with a high degree of confidence. These methodologies have been intensely scrutinized by our risk committees and our regulators, and have been effective in safeguarding the industry.
Given recent price volatility, margins now need to account for larger potential market value changes than those observed earlier in the year. Additionally, intraday price changes and larger volumes have led to more intraday margin calls, which are necessary to cover increased exposure at our CCPs. The risk-based margin methodologies have adjusted to mitigate the market price risks posed by each member’s unsettled portfolio at any time, and collect the appropriate deposits to cover those risks.
Q. How has DTCC worked with key stakeholders around the current crisis?
DTCC is in regular contact with clients, industry organizations, our partners and third-party providers. We’ve provided daily updates to regulators. We have been working very closely with our clients, providing calculators and information that they can use to anticipate margin requirements, and offering consultation around their risk exposures. At the same time, outreach to industry groups such as SIFMA has been an effective way to coordinate broad communications and receive collective industry feedback when time is at a premium.
There is also a very strong peer-to-peer network across the sector among business continuity professions where actions and controls are vetted. Finally, DTCC relies on its vendors and technology partners to ensure we can provide uninterrupted, high-quality service. Our vendor risk management, procurement, and technology teams have been working around the clock and across locations to ensure normal business operations.
Q. Have there been any surprises or learnings?
As a risk manager, I do not like surprises and spend a lot of time planning for various contingencies. We have found ourselves in a unique situation, with tremendous staff and proven technology designed to support evolving industry needs and enable us to excel during these challenging times. We continue to learn that these situations offer an opportunity bring out the best of DTCC.
Q. Any closing thoughts?
These are unprecedented times and we realize the pressures and demands the industry is currently facing. We take our obligations to protect the financial system very seriously and remain committed to safeguarding the industry, our members, and, ultimately, the end investor, today and every day.