IT system of a major UK clearing house experienced a significant disruption on New Year's Eve.
In the world of international financial clearing houses, an IT outage at LCH.Clearnet on New Year's Eve last year caused a ripple effect. Despite no financial losses resulting from the incident, the event highlighted potential latent issues that require attention.
Major IT outages in institutions like LCH.Clearnet and SWIFT can stem from a combination of factors such as software bugs, hardware failures, cyberattacks, operational errors, outdated legacy systems, insufficient system redundancy, or complex interdependencies in financial market infrastructures.
The consequences of such outages are significant. They disrupt transaction processing, elevate systemic risk, cause financial losses, damage reputation, invite regulatory scrutiny, and increase compliance costs. Recognizing these implications, efforts are being made to prevent future outages.
Enhanced IT governance frameworks, risk management protocols, investment in modernizing IT infrastructure, advanced cybersecurity defenses, and continuous monitoring are some of the measures being implemented. Regulatory bodies and committees, such as the Bank of England’s Financial Policy Committee, are also providing reviews and recommendations.
Regulatory amendments and oversight are being put in place to ensure resilience. For instance, the updated Capital Requirements Regulation aims to maintain market stability, indirectly supporting operational continuity.
The annual report from the Bank of England highlighted that LCH.Clearnet's outage was satisfactorily resolved on the day it occurred. However, the report also emphasized the need for robust contingency arrangements to minimize disruption in the event of an operational failure. The nature of the problem at LCH.Clearnet created obstacles to reverting to contingency arrangements and hindered internal and external communication.
LCH.Clearnet, which processes around half of the world's interest rate swap transactions, was temporarily unable to process payments due to the outage. The cause of the IT outage was not disclosed by LCH.Clearnet, but they confirmed that they are investigating the incident. Measures were taken to ensure the IT outage does not happen again.
All systems of LCH.Clearnet were restored by the early evening of 31 December, and payments settled as normal. It's worth noting that recognized payment systems, in general, demonstrated high levels of operational availability over the past twelve months, according to the BoE report.
SWIFT, another recognized payment system, experienced an outage in July 2012. The incident was fully communicated to regulators, exchanges, members, and clients at the time. SWIFT is progressing work to reduce the risk of similar incidents occurring in the future.
As financial market infrastructures continue to evolve, it's crucial that they remain resilient and adaptable to prevent potential IT outages. The initiatives being taken aim to increase operational resilience, reducing the likelihood and impact of future IT failures.
In light of the IT outage at LCH.Clearnet, which highlighted the need for attention towards potential issues in banking-and-insurance and financial industries, enhanced government oversight and adaptive measures are being implemented to bolster resilience, such as stricter regulatory amendments, investment in modernizing IT infrastructure, and the promotion of advanced cybersecurity defenses. On the other hand, the aftermath of an IT outage in the industry, like the one experienced by SWIFT in 2012, has shown the need for firms to communicate incident details and proactively work towards reducing the risk of future occurrences.
