Climate related risks should not only be a focus of asset managers but also financial market infrastructure players can be exposed, according to a new whitepaper from DTCC – – Climate-Related Financial Risk: An FMI’s Perspective.
The paper is the first-ever analysis that examines how climate-related financial risk, namely physical risk and transition risk, may impact FMIs.
DTCC said that while FMIs’ existing business continuity programmes have proven to be sufficiently robust to withstand the impact of extreme weather events, they needed to be enhanced to prepare for potentially more frequent and more damaging climate-related events in the future.
However, it noted that exposure to climate related risks is not as great as financial institutions and given the specific nature of its activities, the duration of an FMI’s exposure is considerably shorter than the risk horizon of other financial services entities.
DTCC noted that existing regulatory frameworks and standards such as the Principles for Financial Market Infrastructures (PFMIs) be applied to FMIs to help mitigate future climate-related financial risk challenges.
PFMIS were created by CPMI-IOSCO contain effective and adaptative guidance that could be applied for this purpose.
“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,” said Michael Leibrock, chief systemic risk officer at DTCC.
He added, as a result, “DTCC includes climate-related financial risk as one of the many potential systemic threats that it actively analyzes and monitors.”
The paper also highlighted that, while green bonds can play a significant role in contributing to the funding required to address the global challenges of climate change, they not be given preferential treatment in terms of how they are risk managed, including in the collateral management process.
Leibrock said, “To do so, in our opinion, would be to prioritize environmental considerations above the core mandate of FMIs of ensuring a resilient post-trade infrastructure for the securities industry.”
For its part, DTCC’s business continuity team is adding climate-related trending metrics to its existing programs to improve the company’s risk management capabilities.
Its counterparty credit risk team is also looking to incorporate climate-related risk monitoring as part of its overall approach to assessing counterparty exposure, compliance, controls, and governance.
“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,” said Adrien Vanderlinden, DTCC systemic risk executive.
He added, “In support of this, we have embarked on a multi-year program to reduce our carbon footprint operationally, through our suppliers, and as financiers of renewable energy.”
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