Luxembourg post-trade risk event

On Thursday 28 April, Thomas Murray hosted a half-day event in Luxembourg entitled Post-trade risk roundtable: How to effectively identify, monitor and manage post-trade risk. The event sought to explore the regulatory hurdles faced by those involved with the funds industry, and how firms can mitigate risks in their post-trade networks.

As depositary banks are liable for assets in their custody and management companies are accountable for the on-going monitoring of their delegates, it is essential that both entities choose and supervise their counterparties and any services that have been delegated with caution. The day provided management companies and depositary banks with the opportunity to come together and share their approaches and concerns with respect to monitoring their exposure to post-trade counterparty risk.

The first part of the event included a presentation by Nick Bradley, chief risk and ratings officer at Thomas Murray, who spoke about the most important questions investors should be asking when it comes to the impact of recent regulations on the post-trade landscape. Themes throughout the presentation centred on why cash and securities are treated differently, how account structures can impact the safety of assets and what investors need to consider with regards to IOSCO’s standards for custody of assets and asset safety.

The later discussion led by Jim Micklethwaite, director of Capital Markets and Agent Bank Group, focused on best practices for monitoring post-trade risk. Micklethwaite’s talk highlighted the importance for end investors of understanding financial, operational, asset safety and asset servicing risks. Exposures may arise through the use of global custodians, sub-custodian banks and market infrastructures. An emphasis was placed on the importance of performing periodic on-site due diligence, as well as evaluating network management capabilities of global custodians in order to mitigate risk exposure from their sub-custodian network.

Janet Wynn, chief operating officer at Thomas Murray, wrapped up the event by presenting Thomas Murray’s technology platform, SupplierSelect for Financial Services as a solution for streamlining the due diligence process and managing a large number of questionnaires.

During the event, over 25 depositary banks and management companies took part in a short poll on the effect post-trade counterparty risk poses to their business. Results from the survey indicated that there is a general need to measure and monitor risk exposure. While the probable loss of assets due to financial and/or operational failure of a post-trade counterparty was viewed by the majority of respondents as less than five per cent, it could nevertheless adversely impact fund performance.

Half of respondents believed that their greatest risk exposures reside equally between their local market sub-custodian banks and transfer agents. The next greatest risk exposures lies with local market Central Securities Depository (CSD) with 43 per cent of those polled expressing concern about the risk arising from country market  infrastructures.

More than 60 per cent of respondents felt that there would be a high risk of loss of assets or value, if one of their post-trade counterparties failed.

The underlying theme throughout the event was the increasing need for funds to monitor market and counterparty risk, as focus on these risks continues to play an increasingly vital role in assuring the safety of invested assets.

Thomas Murray will be running a series of events on similar topics in different locations. The next instalments will be a similar event in Dublin, Ireland and a workshop on the trends in custody and post-trade risk in Toronto, Canada on Monday 20 June 2016.

If you have any queries about the event in Luxembourg, or future events, please contact Claudia Cavallo for more details.

Tags: post-tradeLuxembourgCounterparty Risk