The Depository Trust & Clearing Corporation (DTCC) has identified the key priorities where financial market infrastructures (FMIs) should focus in the coming years to proactively and effectively manage risk in a post-pandemic environment. In a new white paper – Covid-19: Impact and Implications for Financial Market Infrastructures – DTCC explains that FMIs around the globe performed remarkably well amid unprecedented market volatility and record trade volumes in the wake of the coronavirus outbreak. However, the pandemic’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.
In response, DTCC has identified a number of key challenges and implications for FMIs, which play a crucial role in safeguarding global financial stability:
• The impact of the pandemic on 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.
• The market turmoil observed in March 2020 provided additional data on margin procyclicality and illustrated that providing greater margin transparency to clients is key to helping them navigate extreme volatility.
• FMIs should take an enhanced sector-specific approach to managing credit risk to better assess the impact on individual counterparties.
• FMIs should constantly reassess clearing member’s available liquidity, which can deteriorate quickly in periods of market stress.
• An extended remote working environment creates new operational risks with respect to cyber security, third-party dependencies and other aspects, which must continue to be managed.
The paper also notes 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.
“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. While FMIs continued to perform as expected throughout unprecedented market turmoil, risk management practices must continue to evolve,” says Andrew Gray, Managing Director and Group Chief Risk Officer at DTCC. “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.”
