Cyber-security is one of the most pressing systemic risk concerns among financial professionals, according to a Staff Working Paper published by the International Organization of Securities Commissions (IOSCO).
More than 60% of those surveyed by IOSCO identified cyber-security as one of their top five risks. This comes as a number of financial institutions have suffered high-profile cyber-attacks and breaches. The Depository Trust & Clearing Corporation (DTCC) found 46% of market participants ranked cyber-security as the biggest systemic risk in May 2015, a massive increase from 24% one year prior.
Regulators in the US and EU are taking note. The Securities and Exchange Commission (SEC) is scrutinizing the cyber-security protocols at broker dealers and asset managers and has issued repeated guidance on industry best practice.
Meanwhile, the EU’s Network and Information Security Directive is seeking to bolster member states’ cyber security capabilities and increase cooperation as part of the Digital Single Market initiative. The Directive is aimed at all sectors including financial services. The Central Bank of Ireland (CBI) is reviewing cyber-policies at asset managers, while the Bank of England (BOE) recently conducted an industry-wide stress test of banks’ cyber-security procedures.
Common breaches include Distributed Denial of Service (DDoS), which British Telecom (BT) estimated had impacted 41% of global businesses. Other risks include leaking of material, non-public or confidential information or theft of proprietary data.
Regulation was also cited as a major risk to financial stability. Rules such as Dodd-Frank and the European Market Infrastructure Regulation (EMIR) require financial institutions trading over-the-counter derivatives (OTCs) to post high-grade collateral, usually cash or government bonds, as initial and variation margin at central counterparty clearing houses (CCPs). Some have warned this could lead to a drying up of eligible collateral in stressed markets “potentially leading clearing participants to sell assets, making markets even more stressed.”
A study by the DTCC in conjunction with the London School of Economics (LSE) in 2014 said that while a collateral shortfall was unlikely, obtaining high-grade collateral could become more challenging.
IOSCO study finds widespread cyber security concerns
Cyber-security is one of the most pressing systemic risk concerns among financial professionals, according to a Staff Working Paper published by the International Organization of Securities Commissions (IOSCO).