Raising the Resilience Bar

With regulation mandating a more central role in financial markets for market infrastructures, a recent panel discussion hosted by SWIFT revealed how infrastructure providers are evolving to meet tougher operational and financial resilience requirements.

In particular, the principles for financial market infrastructures issued jointly by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (CPSS-IOSCO) have prompted infrastructure operators to raise the level of assurance they can provide in the event of a default.

A panel at SWIFT’s London Business Forum in April, ‘The evolution of market infrastructures: meeting the resilience challenge’, showed that increased resilience is being driven in part by the increased complexity. Big data, cloud computing, greater competition, more regulation, shorter transaction cycles and increased security risks are among the forces leading market infrastructures to concentrate on three resilience priorities: operational risk, cyber-crime, and recovery and resolution.

The end-goal is to ensure a financial institution cannot be dragged down by a market infrastructure failing, or vice versa.

Coen Voormeulen, division director, cash and payment systems, De Nederlandsche Bank, said: “There is increased complexity in cash and securities and a real-time demand for faster payments in the retail sector, notably in the UK. The slack in market infrastructure reduces the integrity of the system.”

Despite the many pressures, panelists expressed confidence in the response of their organisations to new challenges. John Trundle, chief executive officer, Euroclear UK and Ireland, said the Bank of England had found the international central securities depository (ICSD) to be fully aligned with regulatory requirements in terms of its operational risk, cyber-crime and recovery plans. Euroclear UK and Ireland’s operations are now supported by three data centres, Trundle added. “We have reached a new level of resilience. We feel comfortable with it,” he said.

Payments market infrastructures have also upgraded their operations substantially, in part due to regulation, said Voormeulen. “There is rigorous planning and management,” he added. He also warned of the threat of cyber-crime. “We have to up our game from what has been a good practice area to a financial science.”

James Barclay, executive director for global market infrastructures at J.P. Morgan, said stability, predictability and clarity are key to resilience. The regulatory requirement for institutional clients to clear OTC derivatives trades through central counterparties (CCPs) has knock-on implications for clearing brokers, as members and effectively part-owners, in terms of the resilience of such market infrastructures,
Barclay suggested.

“There is an obligation to be resilient to ensure customers are comfortable with you as an institution,” he added. “When considering the need to clear OTC derivatives through CCPs, there should be the same level of resolution across the board.
There is a new requirement to demonstrate resilience for either market infrastructure or banks so that one does not drag down the other.”

Turning to financial resilience, Trundle noted that while the need for CCPs to use their balance sheets was well established, it is also important for ICSDs to give assurances to participants, via use of balance sheet to take on risk. “As part of regulation, this has to be part of the capital structure; ICSDs should have six months of operational expenses with a buffer of nine months. The regulation sets what that recapitalization should be. But the infrastructure also has to continue to operate. There is a case around the public good and continuity of supply for users and clients,” he said.

Mark Hale, director of business and operations at CHAPS, a UK payments infrastructure provider that adheres to CPSS-IOSCO principles, noted that transparency and sharing information with regulators and other stakeholders is key to resilience. “At the first level, all shareholders are directly involved in the organization,” he said. “There is a level of assurance through a financial layer. The challenge is to make sure there is substance over form. We need to engage with [stakeholders] on what that form might be.”

Trundle said information sharing was already improving, noting that Euroclear’s control report is now a public document. Panelists could agree that market infrastructures were responding to changing expectations for assurance and resilience, equally they also suggested more work is needed – collectively and individually – to tackle complexities to come from big data, cloud computing and cyber-crime.