DTCC places fintech and crypto integrations among systemic threats

As the nature of risk continues to evolve and black swan events occur with greater frequency, The Depository Trust & Clearing Corporation (DTCC) 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 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.

Michael Leibrock, DTCC managing director and chief systemic risk officer, said in a statement: “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.”

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:

  1. Implementing agreements between DTCC’s clearing agencies and other FMIs to reduce the risk associated with a common member’s insolvency.
  2. Establishing a cross-functional initiative to address risks related to interconnected entities.
  3. Developing a comprehensive framework to identify, monitor and manage risks posed by links between clearing agencies, financial market utilities or trading venues.

Adrien Vanderlinden, DTCC Systemic Risk executive, said in a statement: “Firms should adopt a multi-disciplinary approach that leverages insights from a diverse group of subject matter experts while ensuring close coordination between stakeholders. In support of this, we invite clients, market participants, and members of the industry to share comments and feedback with us to foster collaboration and information sharing, which are critical in a complex risk environment.”

Read the full whitepaper

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