FMIs well-placed to combat climate-related financial risks, DTCC says
01 February 2023 US
Image: Melinda Nagy/stock.adobe.com
Financial market infrastructures (FMIs) face less climate-related risk than other financial services entities, The Depository Trust and Clearing Corporation (DTCC) states in a recent whitepaper.
The first analysis of its kind, ‘Climate-Related Financial Risk: An FMI’s Perspective’, looks at the physical and transition risks associated with climate-related events such as extreme weather, assessing their impact on FMIs.
While FMIs face direct physical risk and indirect transition risk exposure via their financing activities, this is reduced through financial institutions. The risk exposure of FMIs is also significantly shorter than that of other financial services entities, the report states.
The paper finds that although FMIs’ business continuity programmes have been effective thus far, firms must continue to develop them in light of the potential for more frequent and intense climate-related events.
In order to mitigate climate-related financial risk challenges in the future, DTCC recommends the application of existing regulatory frameworks and standards such as the principles for financial market infrastructures (PFMI).
However, the paper advises that the risk management of green bonds should not be prioritised, regardless of their potential to fund solutions for climate-related challenges. This would undermine the main function of FMIs to provide a resilient post-trade infrastructure for the securities industry, it says.
On its part, DTCC is reducing its climate-related risk exposure by adding climate-related trending metrics to its existing programmes and adding climate-related risk monitoring into its counterparty credit risk assessments.
Michael Leibrock, chief systemic risk officer, says: “Climate change is no longer being considered exclusively an environmental issue, but a multifaceted source of economic and financial risks that could threaten the stability of the financial ecosystem. As such, DTCC includes climate-related financial risk as one of the many potential systemic threats that it actively analyses and monitors.
“This paper examines how climate-related risk can impact FMIs via direct and indirect risk transmission channels. The overarching message is that existing PFMI guidance was appropriately designed by global policymakers to cover FMIs’ unique exposure to climate-related financial risk.”
Adrien Vanderlinden, systematic risk executive, comments: “In addition to our efforts to continue to evolve how we monitor and mitigate financial and transition risk attributed to climate change, DTCC is committed to doing our part to contribute to a greener economy. In support of this, we have embarked on a multi-year programme to reduce our carbon footprint operationally, through our suppliers, and as financiers of renewable energy.”
The first analysis of its kind, ‘Climate-Related Financial Risk: An FMI’s Perspective’, looks at the physical and transition risks associated with climate-related events such as extreme weather, assessing their impact on FMIs.
While FMIs face direct physical risk and indirect transition risk exposure via their financing activities, this is reduced through financial institutions. The risk exposure of FMIs is also significantly shorter than that of other financial services entities, the report states.
The paper finds that although FMIs’ business continuity programmes have been effective thus far, firms must continue to develop them in light of the potential for more frequent and intense climate-related events.
In order to mitigate climate-related financial risk challenges in the future, DTCC recommends the application of existing regulatory frameworks and standards such as the principles for financial market infrastructures (PFMI).
However, the paper advises that the risk management of green bonds should not be prioritised, regardless of their potential to fund solutions for climate-related challenges. This would undermine the main function of FMIs to provide a resilient post-trade infrastructure for the securities industry, it says.
On its part, DTCC is reducing its climate-related risk exposure by adding climate-related trending metrics to its existing programmes and adding climate-related risk monitoring into its counterparty credit risk assessments.
Michael Leibrock, chief systemic risk officer, says: “Climate change is no longer being considered exclusively an environmental issue, but a multifaceted source of economic and financial risks that could threaten the stability of the financial ecosystem. As such, DTCC includes climate-related financial risk as one of the many potential systemic threats that it actively analyses and monitors.
“This paper examines how climate-related risk can impact FMIs via direct and indirect risk transmission channels. The overarching message is that existing PFMI guidance was appropriately designed by global policymakers to cover FMIs’ unique exposure to climate-related financial risk.”
Adrien Vanderlinden, systematic risk executive, comments: “In addition to our efforts to continue to evolve how we monitor and mitigate financial and transition risk attributed to climate change, DTCC is committed to doing our part to contribute to a greener economy. In support of this, we have embarked on a multi-year programme to reduce our carbon footprint operationally, through our suppliers, and as financiers of renewable energy.”
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