As Managing Director, Head of Counterparty Credit Risk and Systemic Risk at the Depository Trust & Clearing Corporation (DTCC), Michael Leibrock is responsible for the identification and monitoring of potential systemic threats to DTCC and the securities industry, actively engaging with DTCC clients and regulators on systemic risk topics and producing periodic industry white papers and other thought leadership products.
In 2012 the Financial Stability Oversight Council (FSOC), created by the Dodd Frank Act as a by-product of the financial crisis of 2008-2010, designated central counterparties such as the Options Clearing Corp. (OCC), the Chicago Mercantile Exchange (CME) and the Depository Trust & Clearing Corporation (DTCC), to name a few, as Systemically Important Financial Market Utilities (SIFMUs).
SIFMUs provide critical services to financial institutions such as trade guarantees, trade netting, collateral efficiencies, etc., for billions of dollars of transactions on a daily basis, reducing risk for the entire financial system. Banks, broker dealers and financial regulators such as the S.E.C. and the Federal Reserve look to SIFMUs to provide stability during periods of market stress or crisis.
For decades SIFMUs have demonstrated the critical nature of their role by mitigating risk for the financial industry during prior periods of intense market and economic volatility, most notably during the 9-11 attacks, the financial crisis of 2008-2010 and Superstorm Sandy in 2012.
For decades SIFMUs have demonstrated the critical nature of their role by mitigating risk for the financial industry."
However, during so-called “normal” times, when the economy and financial markets are stable, SIFMUs quietly go about their core business of providing central counterparty services to virtually the entire U.S. financial sector. It is also during these quiet periods when markets are rising and the economy is vibrant, that SIFMUs undertake rigorous, ongoing testing and planning for significant events that can threaten the stability of the financial sector. One might ask why spend so much time, effort and resources planning that things will go bad when times are so good? The answer can be found in the very mandate of central counterparties along with their designation as “Systemically Important”.
DTCC, my employer, is a critical partner to the financial industry—nearly all equities and fixed income trades in the United States clear through our NSCC, DTC, and FICC subsidiaries. DTCC processes over 100 million of securities transactions each day! Shortly following the end of the financial crisis, DTCC formed the Systemic Risk Office which I manage. The mandate of this group of risk professionals is to identify, monitor and mitigate systemic threats to our firm. One important component of this function is to perform hypothetical stress testing to assess the financial impact of a wide range of events that haven’t yet occurred, but are considered extreme but plausible and which could have a significant effect on financial markets and DTCC. DTCC also utilizes its Systemic Risk Council which is comprised of senior managers from across the organization, including our Chief Executive Officer and Chief Risk Officer. This Council meets on a regular basis in normal times and also serves as a crisis response forum whenever significant events occur, such as this pandemic. During the most volatile periods of the pandemic, in the spring of this year, financial markets and the economy both experienced unprecedented dislocations. Despite this, DTCC and the other SIFMUs were able to seamlessly manage the extreme credit, market and liquidity risks that emerged because they were prepared to quickly adjust processes such as increased margin calls and enhanced counterparty risk surveillance.
One might ask why spend so much time, effort and resources planning that things will go bad when times are so good? The answer can be found in the very mandate of central counterparties along with their designation as 'Systemically Important'."
In addition to the monitoring of possible financial risk threats described above, DTCC also has a robust focus on operational and physical risks. The Business Continuity Management and Resilience department evaluates proactive and reactive measures to ensure the continued operation of the firm. In 2007, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to identify continuity planning to minimize the potential adverse effects of a pandemic. That same year, the financial services industry conducted a pandemic flu exercise designed to stress test the business continuity plans of more than 2,700 participating organizations. In 2014, the financial sector conducted a refresher exercise to validate the controls detailed in the FFIEC’s 2007 guidance. One of the biggest challenges that DTCC faced from an operational standpoint was helping people adjust to operating in a different environment and adapting to all the unknowns. Many of us had never managed or worked for an extended period in a remote situation, and some needed to alter their management style. DTCC helped employees acclimate through constant communication, including frequent company updates and leadership calls. Zoom calls have been a vital substitute for in-person meetings and helped many through the adjustment phase.
As noted above, for many decades SIFMUs have provided critical services for the financial sector, both during good times and during some of history’s worst financial and operational calamities. These numerous experiences, along with SIFMUs practice of relentlessly performing ongoing stress testing and scenario planning during normal times, all helped ensure that SIFMUS were prepared to fulfill their roles as critical infrastructures during the events of COVID-19, once more living up to their regulatory designation of “Systemically Important”.
The views expressed are those of the author and do not necessarily represent the views of any other person or entity.
