Network management may become the most important part of a bank or custodians business, says a senior chief at central securities depository (CSD) risk assessment group Thomas Murray.
If you go back 10 to 15 years, network management was relatively easy compared to now, says Tim Reucroft, Director of Thomas Murray. With the changing landscape in regulation and business in general, network management could either disappear altogether or become the most important part of a bank. For instance, UCITS IV could change network management forever as those who change the entities network management could put the bank directly at risk.
While, Reucroft says that the whole nature of the business is changing, there are other issues that custodians and banks need to focus on, in terms of risk management, in order to further safeguard their businesses.
There are plenty of risk assessments for CSDs, which is primarily what Thomas Murray concentrates on, which of course is vital for knowing the risks in your business, says Reucroft. However, who is doing the due diligence for central counterparty clearing (CCP)? By design, the entities are designed to concentrate risk.
On July 21, 2010, the US saw the largest financial system overhaul in over 20 years. The Dodd-Frank Act was signed into law, which, among other changes, meant that all over the counter (OTC) derivatives would have to be cleared by a CCP.
There has been criticism that the system would funnel risk into one system, which suggests that if there was a counterparty default, that all other participants would be placed at default risk too.
However, other market participants believe that in fact the model reduces the risk because the chances of a default would be smaller if counterparties met all collateral requirements for the CCP.
“A main form of risk overall that needs to be addressed in legal risk,” says Reucroft. “While, many people have liquidity risk, operational risk and asset servicing risk sorted, legal risk is somewhat out of your hands as regulators control this.”
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(LB)