The financial services industry is working hard to ensure the markets continue to function normally despite the volatility and economic impact of the ongoing coronavirus (COVID-19) pandemic. How do you expect regulators to respond?
While it’s not possible to predict the future, ahead of COVID-19, momentum was building with respect to regulatory discussions around operational resilience, and naturally, it’s an area of focus that is of increasing importance as the pandemic continues to create unprecedented challenges for companies across all sectors, including financial services.
Late last year, the Bank of England (BoE), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published Consultation Papers (CPs) which included proposed requirements aiming to strengthen operational resilience across the industry. Guidance from the Basel Committee’s Operational Resilience Working Group and the Federal Reserve Board of Governors is expected to follow.
Meanwhile, COVID-19 has shifted immediate regulatory priorities to providing relief through the postponement of several implementation deadlines, such as the Securities Financing Transactions Regulation (SFTR) and the Fundamental Review of the Trading Book (FRTB), as well as the UK CPs previously mentioned. That said, regulators have remained consistent that it is the responsibility of firms and Financial Market Infrastructures (FMI) to take ownership of their operational resilience, and have called upon firms to consider the impacts when making plans and investment decisions around resilience. As the COVID-19 situation continues to develop, a broad, collaborative approach to operational resilience will be essential to ensure the continued safety and security of the financial markets.
How can firms take a collaborative approach to ensuring operational resilience now and in the future?
While industry conversations around resilience will certainly continue and evolve, firms and FMIs may find that the most effective way to foster resilience is by first looking inward. Firms and FMIs can protect the industry by taking a comprehensive approach to assessing their own critical services, with consideration given to how disruptions can affect the industry as a whole. Once these assessments are complete, firms must communicate and collaborate with each other, and with regulatory bodies, both to determine the optimal way to further safeguard the resilience of critical services, and to ensure an industry already impacted by the effects of COVID-19 can cope with any further reforms.
As an industry, financial services has weathered a number of disruptive events. How have lessons learned in the past informed the response to COVID-19?
In terms of scale and global impact, COVID-19 is unprecedented, but experiences navigating past crises have enabled the financial services industry to reflect and improve, putting the sector in a position to continue to operate. Lessons from past crises such as the 9/11 terrorist attacks, Superstorm Sandy, and the Lehman collapse have led to improvements in infrastructure, automation and the overall industry operational footprint. The most obvious capability is our ability to work remotely – organizations with full, robust virtual desktop infrastructures (VDI) have excelled in this new environment, by seamlessly maintaining full business operations while out of physical offices in order to control the spread of COVID-19. Additionally, automation capabilities have improved, with firms focused on eliminating or removing manual processes that were impacted by physical events in the past. There’s no doubt that firms will continue to replace manual processes with automation, where possible.
Past crises have also led the industry to appraise its operational footprint. Those evaluations have led to additional resiliency measures, such as geographic dispersion of staff, enhanced transfer of work abilities between sites and improved operational and cybersecurity approaches. They have also led to increased risk management capabilities and oversight of third-party service providers, which is critical in today’s environment.
How will the industry conversation around operational resilience evolve during 2020?
As the industry navigates this pandemic, the lessons we’ll learn will inform future conversations around resilience, likely focusing on interconnectivity of firms and whether the design of current resilience measures are scalable. After all, truly resilient approaches must ensure the continued, smooth operation of all processes in all locations.
It also seems likely that ongoing discussions about resilience will increasingly focus on the importance of sector coordination. In response to COVID-19, regulators, market participants, service providers, associations and policy makers have and continue to ensure ongoing dialogue on how to continue the smooth operation of the financial marketplace given the circumstances.
Why does DTCC volunteer and support ISITC?
As the industry continues to balance technological innovation with mitigating the impact of geopolitical events, we expect the digital transformation of financial services to continue with a renewed emphasis on operational resiliency. ISITC's stated focus on sustainable financial markets, cloud standards, blockchain/distributed ledger technology, reference data standards and operational excellence are aligned with DTCC's commitment to drive positive change across global markets through collaboration with the industry, in order to ultimately create the marketplace of the future.