In other financial technology news, CLS and Markit have joined forces to take on cross-currency swaps while LME Clear debuts trade compression and collateral services.
Risk Managers’ Fears Grow Over High-Impact Event: Survey
Fears over the threat of “a high-impact event” is increasing among risk managers, according to the latest DTCC Systemic Risk Barometer Survey.
The new survey on risk trends among those in the financial services industry shows that 61 percent of risk managers “believe the probability of a high-impact event in the global financial system has increased during the past six months,” according to officials at post-trade services provider DTCC.
In addition, the survey finds that nearly half of all respondents, or 45 percent, across functional departments believe the probability of a high-impact event in the global financial system has increased during the past six months, “an increase of 16 percentage points since the last survey was conducted earlier this year,” according to the DTCC. “When asked which risks contributed to this concern, respondents said that cyber risk, geopolitical risk and the impact of new regulations added most to fears of a high-impact event.”
The cyber risk concerns are consistent with a previous survey conducted in Q1 2015 as cyber risk remains the top concern globally, with 70 percent of all respondents citing it as a top five risk, DTCC officials say. In North America, concerns were even higher with 77 percent identifying cyber security as a top five concern, according to the DTCC.
“When it comes to fighting cyber risk specifically, we’re seeing a lot of market participants collaborating to a greater degree than in the past. More and more firms are aware of how information sharing can help prevent and minimize incidents while making it more expensive for hackers to be successful. This is one area where resources are being allocated,” said Mark Clancy, CEO of Soltra, a joint venture between DTCC and the Financial Services Information Sharing and Analysis Center (FS-ISAC), in a prepared statement.
Beyond fears over cyber-attacks, geopolitical risk and the impact of new regulations were identified as the second and third highest risks globally, “cited by 50 percent and 41 percent of all respondents, respectively,” DTCC officials say.
European-based respondents often rank geopolitical risk higher, while respondents located in the Asia-Pacific region or working for APAC firms expressed particular concerns over an economic slowdown outside of the E.U./U.S, officials say.
Many respondents also commented on concerns related to market liquidity with one respondent saying: “The volatility will be exacerbated by the lack of liquidity in the markets caused by over-regulation.”
In response to these real and potential threats, 72 percent of all respondents indicated their firms have increased the amount of resources dedicated to “identifying, monitoring and mitigating systemic risks over the past year – continuing a strong trend identified in previous surveys,” officials say.
“The survey is an important tool for identifying current market concerns. I think it’s also a great reminder of the ever expanding list of complex risks companies have to manage,” said Michael Leibrock, managing director and chief systemic risk officer at DTCC. “It’s a challenge for many, and we’re committed to partnering with the industry to help mitigate risk whenever we can.”
The survey was completed by approximately 400 DTCC clients and a broad range of international participants across the global financial services industry in September and October 2015.
CLS and Markit Launch FX Settlement for Cross-Currency Swaps
CLS Group (CLS), a risk mitigation and operational services vendor for the foreign exchange (FX) market, and Markit, a provider of financial information services, has launched a new FX settlement service for the cross currency swaps market, according to officials from both vendors.
The new service will work by letting CLS receive settlement instructions from cross currency swaps electronically confirmed using MarkitServ, the over-the-counter (OTC) derivatives trade processing service from Markit, officials say.
The new settlement service focuses on cross-currency swap trades that expose counterparties to “significant settlement risk due to the high value of initial and final principal exchanges,” officials say.
The new offering provides a streamlined process for the payments related to these trades by incorporating them into CLS’s existing payment-versus-payment (PvP) settlement service, officials say. “The new service, developed in consultation with leading financial institutions in the cross-currency swaps market, creates greater operational efficiencies and, through multilateral netting, reduces liquidity and payment demands across the industry,” officials add.
Settlement is “a critical risk for the market to manage, particularly across products where the exposure to FX settlement can be significant,” says Charles J. Bristow, co-head of global rates trading and head of funding for macro markets at JPMorgan in a prepared statement. “This new service developed by CLS and Markit to settle cross currency swaps is an important step which will help to mitigate settlement based risks,” Bristow says.
“Demand for more effective post-trade clearing and settlement services from regulatory bodies and market participants has never been more acute. The extension of CLS’s settlement service to the growing cross currency swaps market is a welcome addition that will mitigate systemic risk and reduce counterparty exposure across OTC markets,” says Andrew Hinchliff, executive general manager, global markets, IB&M division, at Commonwealth Bank of Australia, in a statement.
LME Clear Launches Trade Compression, Collateral Services
LME Clear, the clearinghouse of the London Metal Exchange (LME) market, has launched two new services — trade compression and the ability to post metals warrants as collateral.
LME Clear officials say it is the first clearinghouse “ever to accept warrants as collateral,” officials say. “Market participants are now able to place their metals ownership documents against their trading positions as part of the clearing process, giving the LME market a new source of protection against risk.”
The trade-compression service lets members reduce the notional value of their positions and simplify their portfolio management, officials say. “The new post-trade, risk-neutral system allows members to offset multiple trades that have compatible characteristics into a single trade, or reduce the trades to a net zero position, without altering the risk profile of their portfolio. One member has already reduced their notional by 90 percent,” officials say.
Officials timed the launch of the new services to coincide with an upgrade of LME Clear’s real-time clearing system, LMEmercury, which took place on November 23.
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