VIDEO | Risk isn’t something to be feared; neither can be it avoided. Pointing out that it exists in every industry, Emma Johnson of JP Morgan said, “The key is how you mitigate and manage it”. In the session titled “Securities Services risks (with ISSA)” at the PostTrade 360° Nordic 2024 conference, she discussed the upcoming paper on securities services risks that the International Securities Services Association (ISSA) is currently working on, and some of the most pertinent issues the publication will cover.

Now being prepared for its third version, the paper will reiterate some of the risks identified in previous versions and add new ones to reflect the current environment.

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Client and third-party risk

Pointing out that everyone in the industry is interconnected, Johnson said, “The weakest link isn’t necessarily always yourself. It’s who you transact with, who you support, who you’re providing services to, who they’re providing services to, and so on. It’s contagion risk that we could fall foul of.”

“Stringent protocols” for onboarding a client are par for the course in the industry, but these are “a bit of a myth”, said Johnson, because they are not just onboarding protocol. “It’s consistent; it’s even daily. You are always monitoring the client,” she explained. “You’re monitoring any deterioration to their credit. You’re monitoring any issues in their ability to transact, to instruct, to settle, to fund. You’re monitoring that client consistently. In a similar way, the client will be monitoring the security servicer, because again, you don’t want to have any weak links.”

Asset protection risk

Here, again, the industry ecosystem – its interconnectedness – comes into play. “The clients are appointing the custodian to achieve trust. They want their assets to be safe. They require the custodian to be highly capitalised, resilient. They want the custodian to have controls,” Johnson said. “And when you (the custodian) are interacting with your subcustodian network and the CSDs, you expect and demand the same.”

Following the financial crisis of 2008, “a whole amalgamation of acronyms” were established to “strenghten the asset protection risk regimes”. “What we have seen in recent years, post the financial crisis, through very difficult times, like COVID-19, market volatility and the Russian-Ukraine war, is that the ‘medicine’ has worked.”

Operational risk

Johnson described the chapter on operational risk in the previous paper as “a monster” because it’s a topic that covers “everything post-trading”. The older version of the paper had separate chapters for every operational segment, including settlement, clearing, and asset servicing.

For the next paper, Johnson has endeavoured to consolidate the chapters under one overarching theme. “When we looked at it more holistically, what does it come down to? It comes down to an effective risk environment in your institution,” she said.

Clients today are a lot more demanding in terms of accountability, resulting in “more transparency” in client reporting. “There’s nowhere to hide when it comees to operational risk.”

Systemic risk

One of the new chapters in the upcoming paper is on systemic risk, added because “recent times have really tested these frameworks”.

 “We (securities services) are key to the functioning of the broader financial system,” Johnson said. Bringing up interconnectedness once again, she described entities such as CSDs and custodians as systemically important entities that are in a chain. “Any breakdown in this chain could be significantly disruptive to the wider industry.”

Recent geopolitical events have catalysed the ramping up of resilience and stress testing, market risk management, monitoring, and screening. Sanctions and embargoes are terms we have heard before recent years, but – “Did we really know what they meant and how they impacted our day-to-day asset safety, the ability to transact, to move and hold securities, and to value securities ?” she asked. Therefore, recent events have “really changed the DNA of the security servicer”.

Speakers:
Emma Johnson, Executive Director, JP Morgan
Karen Zeeb, COO and Company Secretary, ISSA

Hosted by ISSA

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
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