Digital Operational Resilience Act (DORA)

One of the key lessons of the 2007-2008 global financial crisis is the importance of financial market infrastructures (FMIs) as a pillar of financial stability. Before, the role of financial market infrastructures, namely the provision of trading, clearing, settling, recording, and compressing services for transactions between financial institutions (FIs) was often taken for granted. This was reflected in FMIs having often been referred to as the financial system’s plumbing, including by the Federal Reserve’s 14th chairman (Bernanke, 2011)—a clear reference to the critical yet concealed importance of FMIs in the safe and efficient functioning of financial markets. Today, it is clear that the failure of an important FMI will almost certainly lead to systemic instability in financial markets. Given this, it is evident that FMIs are critical infrastructures; that is, based on a definition by the European Commission (2008), FMIs can be considered systems that are essential for the maintenance of vital societal functions, health, safety, security, economic or social well-being of people. In light of this importance, it’s perhaps surprising that the literature about financial networks has addressed the importance of FMIs rather recently and sparingly. The archetypical financial network, composed of FIs as elements (the nodes) that are interlinked through different types of relations (e.g., exposures, payments, ownership, common holdings), has been complemented by the introduction of FMIs as an additional layer that provides a medium for FIs to interact. As highlighted in Berndsen, et al. (2018), a network of FIs that does not include FMIs is a logical network—one that displays bilateral relations despite those requiring the intervention of an FMI to exist. And that’s why the plumbing reference is particularly illustrative: when looking at the floor plan of a house, the plumbing is a critical additional layer hidden beneath the first—immediately visible—layer; in a building, carelessly knocking down a wall could have a disastrous effect on the supply of water, electricity, gas, communications within the apartment and even to others above and below–not to mention the effect on the structural integrity of the building. However, there are further layers beneath those containing FIs and FMIs. In fact, a financial network composed of FIs and FMIs is still a logical network, as the connections between FIs and FMIs also require the intervention of other elements to exist. Those elements provide the physical connection that enables the interlinkages among FIs and FMIs, in the form of wired (e.g., cable) or wireless (e.g., radio waves) connections. That is, as stated by Berndsen, et al. (2018), the interdependence of financial markets with physical networks, such as power and communication networks, make those networks critical infrastructures and obvious candidates for examining the stability of financial systems from an operational perspective.