DTCC paper on the repercussions of Covid for FMIs

Andrew Gray, Managing Director and Group Chief Risk Officer at DTCC.

The Depository Trust & Clearing Corporation (DTCC), published a new White Paper, Covid-19: Impact and Implications for Financial Market Infrastructures, which shows that financial market infrastructure (FMI) may have “performed remarkably well” amid unprecedented market volatility and record trade volumes, but the pandemic has left its mark.

The paper notes that Covid-19’s considerable impact on the macroeconomic environment and systemic vulnerabilities will likely cause structural changes to the financial services industry, as well as the regulatory landscape and legislative agendas.

It points out that the longer-term effects of the pandemic will likely reverberate through the financial industry for years to come and could weigh on the financial sector’s profitability, potentially contributing to further consolidation within the industry.

Against this backdrop, DTCC has identified several key challenges and implications for FMIs.

It said, the  pandemic for markets was “a real-life stress test for FMI risk management regimes, and lessons learned from this crisis should be factored into risk models moving forward.”

These include the fallout from the market turmoil seen last March 2020. It provided additional data on margin procyclicality and illustrated that providing greater margin transparency to clients is key to helping them navigate extreme volatility.

Moreover, FMIs should take an enhanced sector-specific approach to managing credit risk to better assess the impact on individual counterparties. They should also frequently reassess clearing member’s available liquidity, which can deteriorate quickly in periods of market stress.

Cyber security, third-party dependencies and other aspects should also be continually managed as an extended remote working environment creates new operational risks.

“Extreme events, such as the COVID-19 pandemic, illustrate and reinforce the importance of an unwavering commitment to risk mitigation and resilience across the industry,” said Andrew Gray, Managing Director and Group Chief Risk Officer at DTCC. “While FMIs continued to perform as expected throughout unprecedented market turmoil, risk management practices must continue to evolve.”

He added, “As the industry adapts to the new normal and ultimately a post-pandemic world, we must take a close look at the risk management implications for FMIs that emerged from this crisis and address those areas to help us prepare for the next one.”

©BestExecution 2020