Systemic risk management is “a daunting task but one that is necessary,” according to a panellist at this year’s World Forum of Central Securities Depositories (WFC).
The comment was made by Adrien Vanderlinden, executive director at DTCC’s Systemic Risk Office during the ‘Global stability threats and systemic risks in post-trade’ panel.
Vanderlinden suggested that Central Securities Depositories (CSDs) must focus on both their exposure and contributions to systemic risk in order to maintain their roles as market protectors.
Considering the role of CSDs in systemic risk management, Pheona Härtel, head of legal, risk and compliance at Strate, argued that CSDs hold many roles, one of which is to be a regulator. She suggested that this allows them to take a neutral approach to risks, adopting a “bird’s eye view” and helping to contribute to policy and regulation.
While Härtel stated that CSDs, in their capacity as regulators or in vertically integrated financial institutions, have access to more data than other regulators, Vanderlinden argued that CSDs “only see a part of the picture” and are unable to see other financial market infrastructures’ books. In contrast, regulators are able to gather data across silos and are granted access to a broader range of information.
In terms of CSDs’ contributions to regulation, Oleksii Yudin, chairman of the National Depository of Ukraine, suggested that the data from issuers and custodians that regulators base their decisions on is often out of date by the time they’re taken into account. CSDs, on the other hand, regularly interact with custodians and issuers and could collaborate with regulators in order to provide up-to-date market data and prevent negative market events.
Collaboration was also mentioned by a second panellist, who discussed the work of the Turkish central bank, in partnership with government ministries and both financial and non-financial institutions, to gather transaction reporting data. Having this data allows for the digitisation of structures, and results in “very strong” management of systemic risk, they said.
According to an audience poll, the most pressing systemic risk to markets is cyber attacks. Following this, market infrastructure breakdowns, technology breakdowns and participant defaults were also identified as key risks.
Pierre Paul Stacanov, chief risk officer at ESES Euroclear Group, asserted that although the industry is continually getting better at dealing with cyber attacks, the attackers are evolving their methods too. He predicted that this risk is one that will never be fully eliminated, particularly as constant industry innovation and the introduction of new technology creates a “more complex risk universe”.
In order to protect themselves as much as possible from cyber attacks, industry players need to identify stress factors and signs of vulnerability and ensure that their systems and controls are robust, Stacanov affirmed.
Vanderlinden stated that cyber threats are top of mind, and for good reason — facing a successful cyber attack is “likely just a matter of time”, he said, emphasising the need to have contingency plans in place. These could include all members reverting to a “known good state” once an attack is identified. This, again, would require communication across the industry in order for rebuilding efforts to be effective.
One speaker suggested that while technology problems can be solved with technology-based solutions, the impacts of macro, geopolitical and social issues are harder to rectify. Micklethwaite raised the importance of integrating macro and geopolitical risks when building models from the ground up, with Härtel suggesting that without taking these issues into account, blind spots could appear throughout market infrastructures and possibly the ecosystem that they serve. “Systemic risk is systemic,” she said, emphasising the need for consideration of a top-down and ground-up perspective when models are being created.
Whatever solutions CSDs come up with to combat systemic risks, they cannot be created in a vacuum, Vanderlinden warned. While a final poll revealed that approximately 62 per cent of the audience believed that their CSDs were “mostly prepares with some exceptions” when it came to the risks discussed in the panel, the constantly evolving systemic risks and threats to global stability will require fast, efficient and effective action on the part of CSDs.
