Tom Isaac, Managing Director, Global Transaction Services, Citi

The question is less what the payments industry will learn about risk than whether it needs to, suggested panellists at Tuesday’s session ‘Risk: will we ever learn?’, moderated by Agustin Lago, Head of Global Payments Risk at Barclays. The session combined optimism over infrastructure performance in the recent crisis with fatalism when it came to avoiding the next one.

Clearstream Head of Business Development and Member of the Executive Board Mark Gem suggested relatively recent innovations – such as CSDs and CCPs – had proved their worth. “It’s hard to imagine what would have happened without them,” he said. “At one level, we did learn that at least our investment in increasing efficiency and reducing risk to some extent paid off. But will we learn how to avoid crisis? Clearly not.”

Esmond Lee, Executive Director of the Financial Infrastructure Department at the Hong Kong Monetary Authority (HKMA), agreed the crisis was “not a technical issue”.

“The trouble was with transactions settled bilaterally rather than those settled via well-established payments systems. The question is how to get payments into a proper settlement system,” he said, pointing to HKMA’s introduction of a unit trust fund settlement service aimed at shifting transactions into the system.

If the crisis taught custodians that they’d made the right infrastructure investment decisions, it also revealed the extent to which their institutional clients had underestimated their own exposure. From a custodian’s perspective, observed Bob Baillargeon, Senior Vice President of Enterprise Risk Management at State Street, the surprise had been the volume of risk-related questions the bank had received from institutional clients. “They were seeking information in a way they never had before,” he said. “It became clear they hadn’t tracked their exposure.”

According to Baillargeon, institutional clients have long taken custody services such as intraday liquidity for granted. “They’ve assumed it was there in all conditions, at all times. Perhaps we should do more to educate them.”

“There has been a sea-change in how institutional investors look at their risks.” Tom Isaac, Managing Director, Global Transaction Services, Citi

Since the crisis “there has been a sea-change in how institutional investors look at their risks,” said Tom Isaac, Managing Director of Global Transaction Services at Citi. “Before, they presumed their exposure went away at the end of the day. Lehman Brothers proved that’s when they should start worrying.”

If there remain systemic faultlines, they occupy a collapsed settlement timeframe. Baillargeon pointed out that in the US, the crisis had created a potential intraday credit mismatch as investors abruptly pulled out of equities in favour of treasuries – settled via different systems. “At the worst possible time it was draining liquidity from the system,” he said.

Crises in history

Yet the panellists suggested forecasting further crises was probably a waste of time. “Financial crises are as old as money,” said Gem. “What’s clear is that it’s difficult to identify speculative bubbles until they burst.”

Despite the broad consensus that market infrastructures had mitigated the potential fall-out, Isaac warned of slippage. “CCPs played a tremendous role in high volatility and proved that margins engines worked.

But now it seems they’re competing by changing margin requirements from five to three days,” he pointed out. “They’re competing on risk rather than on service and fees and I’m concerned that we’ll go back to competing on some of the risk.”

In the meantime, the panel warned against attempting reactive quick fixes. Isaac pointed out that it took more than two decades for the industry effectively to eliminate Herstatt risk with CLS.

“It may be too soon to tell what we should be concerned about,” agreed Gem. “There is a danger of jumping on certain trends. Instead we should focus on those things we know require time and effort – even if they didn’t cause the recent crisis.”



Back to headlines