Federal Reserve Bank of New York ("NY Fed") Senior Vice President Jeanmarie Davis emphasized the importance of collaboration among regulators, supervisors, and market participants to address systemic risks. In remarks at the Risk USA 2017 Conference in New York, Ms. Davis described three examples of collaborative efforts that are all at varied stages of resolution including: (1) the shift to a T+2 settlement cycle, (2) margin regulations and (3) cybersecurity.
T+2 Settlement
Ms. Davis highlighted the recent industry-wide shift to the T+2 settlement cycle. This shift, she said, was an example of a successful, completed and collaborative effort that included input from "more than 600 market participants across 12 market segments." The move involved multiple studies, the formation of a working group, and support from regulatory agencies. Further, the shift represented a coordinated effort to conform rule changes which provided much-needed "regulatory certainty" surrounding the transition.
Margin Rules
Ms. Davis identified the margin rules as an example of an ongoing collaboration that is still a "work in progress." She emphasized that the complicated nature of developing margin rules – including the bilateral nature of the trades, the necessary updating of legal documents governing such trades, the requirement of new models to calculate margin, and the external infrastructure required to ensure segregation of collateral – contributes to the need for industry-wide coordination.
Ms. Davis explained that there have been certain challenges as a result of "external dependencies" (such as the necessity of a third-party custodian infrastructure). However, she noted the success of the International Swaps and Derivatives Association's ("ISDA") working groups in developing industry-standard documentation. As of result of these efforts, Ms. Davis said, there is currently more than $90 billion of margin held in segregated accounts, and the system is less leveraged and better equipped to protect individuals against the effects that may arise from market shock.
Cybersecurity
Ms. Davis described cybersecurity as an area that demands greater attention in order to protect against systemic risk. She argued that the increasing frequency of cyberattacks that target the financial industry accentuates the need for focused efforts on improving resiliency and protectionary measures. In particular, she emphasized cybersecurity incident responses and the recovery of core and critical systems after attacks occur. Ms. Davis called upon industry members to pursue initiatives aimed at mitigating cybersecurity risks, and encouraged regulators to harmonize their rules and frameworks to clarify regulatory expectations for the market.
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