As a Systemically Important Financial Market Utility (SIFMU), the OCC must be able to manage capital and operational risk on a day to day basis and during extraordinary times, when disaster strikes. On the 14th anniversary of the terrorist attacks of September 11, 2001, JLN spoke with John Grace, chief risk officer for the OCC, about the challenges OCC faces as a SIFMU and what he and the organization are doing to address those challenges.
Ways in which the OCC plans to cut down on systemic risk include:
- Making sure the organization has adequate financial resources, which includes the clearing fund, adequate capital, and the models that help the OCC calculate that.
- Technology. OCC handles about four billion trades a year. Risks include not only cyber risk but change management, as new products are introduced to the markets.
- Operational risk. The OCC plans to develop better controls to make sure not only it but the whole industry is safe.
Grace related the story of how, when he was at Citi in 1999, the company prepared a playbook to prepare for Y2K, concentrating on the risk of an impairment of the payment systems. They got through Jan 1, 2000 just fine and the playbook wasn’t needed – but on September 12 it allowed Citi to function and provide collateral and liquidity when a lot of banks in downtown Manhattan were not functioning. He wants to bring that type of playbook to OCC so it can protect itself and help the market as a whole.
The organization is preparing for both cyber and physical attacks, he said. Everyone is mandated to have at least two backup sites, which OCC has, including one in Dallas, Texas. So not only are they dispersed in terms of human resources, but also in recovery sites. The site in Texas has its own power grid, so if the Chicago grid goes down, the Texas site will still be functioning.
He also said that addressing linkages among the organizations in the market is very important.
“I think what we learned from 2008 is that problems aren’t isolated to just individual companies. It wasn’t just Lehman Brothers or AIG or Bear Stearns. When one company ran into trouble, we were so connected in our financial relationships, that if somebody suffered there was a ripple effect. And in 2008 that almost became a tsunami,” Grace said.
The OCC is addressing these linkages by creating third party risk management, looking at its clearing members, exchanges, vendors and banks, and understanding the relationship between all of them and so they can help them prevent or recover from a crisis.
“We’re really trying to work as a foundation for secure markets across the U.S.,” he said.