DTCC says financial market infrastructures face climate-related risks

Rick Steves

“Climate change is no longer being considered exclusively an environmental issue, but a multifaceted source of economic and financial risks that could threaten the stability of the financial ecosystem. As such, DTCC includes climate-related financial risk as one of the many potential systemic threats that it actively analyzes and monitors.”

DTCC has published a whitepaper that examines how climate-related financial risk, namely physical risk and transition risk, may impact financial market infrastructures (FMIs).

The document, “Climate-Related Financial Risk: An FMI’s Perspective,” explains why FMIs can have direct exposure to climate-related physical risk and should be prepared for potentially more frequent and more damaging climate-related events in the future.

The paper recommends that existing regulatory frameworks and standards be applied to FMIs to effectively mitigate future climate-related financial risk challenges. More specifically, the Principles for Financial Market Infrastructures (PFMIs) that were created by CPMI-IOSCO contain effective and adaptative guidance that could be applied for this purpose.

While green bonds can play a significant role in contributing to the funding required to address the global challenges of climate change, these instruments should not be given preferential treatment around how they are risk-managed, including in the collateral management process, the paper added.

“Climate: One of the many potential systemic threats that it actively analyzes and monitors”

DTCC, which stands for Depository Trust & Clearing Corporation, is a leading post-trade market infrastructure for the global financial services industry. On account of climate-related risks, its Business Continuity team is adding climate-related trending metrics to its existing programs to improve the company’s risk management capabilities.

In addition, DTCC’s Counterparty Credit Risk team is looking to incorporate climate-related risk monitoring as part of its overall approach to assessing counterparty exposure, compliance, controls, and governance.

Michael Leibrock, Chief Systemic Risk Officer at DTCC, said: “Climate change is no longer being considered exclusively an environmental issue, but a multifaceted source of economic and financial risks that could threaten the stability of the financial ecosystem. As such, DTCC includes climate-related financial risk as one of the many potential systemic threats that it actively analyzes and monitors. This paper presents an innovative analysis that examines how climate-related risk can impact FMIs via direct and indirect risk transmission channels. The overarching message is that existing PFMI guidance were appropriately designed by global policymakers to cover FMIs’ unique exposure to climate-related financial risk.

Stated Adrien Vanderlinden, DTCC Systemic Risk Executive, “In addition to our efforts to continue to evolve how we monitor and mitigate financial and transition risk attributed to climate change, DTCC is committed to doing our part to contribute to a greener economy. In support of this, we have embarked on a multi-year program to reduce our carbon footprint operationally, through our suppliers, and as financiers of renewable energy.”

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