Given the interconnectedness of the financial system, distress in one segment can easily spill over to the wider ecosystem. In financial market infrastructures (FMIs), including CSDs, concentration risk is of particular concern. This was the motivation behind the European Central Securities Depositories Association (ECSDA) task force set up in 2022 to identify systemic risk indicators. The work of the group has culminated in a recently published report that presents a proposed set of indicators in a risk dashboard.
Pointing out that CSDs should endeavour “not to create stress when the ecosystem is vulnerable and not to be vulnerable when the ecosystem is stressed”, the report suggested four areas that CSDs should monitor: the stress level in the ecosystem, and in CSDs, as well as the vulnerabilities in the ecosystem, and in CSDs.
Three indicators have been identified for each area of monitoring. As examples, under the area of external stress, or stress level in the ecosystem, the proposed indicators are: financial stress, such as volatility in the market; cyber attacks; and performance of market infrastructures. Under internal vulnerabilities in the CSDs, proposed indicators are financial resilience gaps, which can be gauged by profitability, margins, leverage, and capital; cyber security weaknesses; and single points of failure, such as services without back-up solutions.
Fit for purpose
The report concluded that ”the scope and calibration of the indicators to be monitored will vary depending on the risk profile of each CSD, the market(s) in which it operates and its risk appetite and strategy towards systemic risk”. In using the dashboard, each CSD should feel free to determine additional indicators or be more granular in the measurement of the indicators.
ECSDA’s Risk Management Working Group will hold a review of the dashboard by 2025, which will take into account feedback from ECSDA members on its practical implementation.