DTCC’s new white paper – Interconnectedness Revisited – highlights the linkages in the global financial system that pose increased risks and why continued scrutiny is a necessity.
The paper covers a broad range of direct and indirect linkages derived from trade patterns, financial transactions, macroeconomic trends, economic variables, and statistical correlations between the prices of financial assets.
It also explores market structures, operational processes and dependencies, business arrangements (contractual or not), external events and other developments.
The paper builds on themes addressed in DTCC’s 2015 white paper – Understanding Interconnectedness Risks – which explored the dangers of contagion and interconnectedness within the global financial system. It cautioned that the failure of a large financial entity could trigger financial instability worldwide.
The new paper focuses on three key areas starting with the growing importance of Non-Bank Financial Intermediation. It notes that this has increased the potential role that this sector might play in transmitting stress throughout the financial system.
It also warns of the growing reliance on third-party vendors and the ever-increasing proliferation of cyber threats which has created another channel of risk transmission that may have systemic implications.
Fintech is also under the spotlight. The paper notes that innovations continues to change financial services and as cryptocurrencies are starting to become more linked with the global financial system, a new set of financial stability challenges may be emerging.
“An interconnected ecosystem is both beneficial and challenging,” said Michael Leibrock, DTCC managing director and chief systemic risk officer. “While interconnections can provide firms operational efficiencies and other benefits, it’s important to recognise that they may also pose certain risks.”
He adds, “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.”
To mitigate these risks, the market infrastructure provider is taking action including implementing agreements between its clearing entities and other financial market infrastructure to limit the risk connected with the insolvency of a common member.
It is also developing a rigorous and comprehensive framework to identify and manage risks associated with the interconnectedness of clearing entities, trading venues and financial market utilities.
©Markets Media Europe 2022
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