The innovation imperative: balancing progress and stability in finance

How should regulatory frameworks evolve to accommodate innovations like blockchain, AI, and decentralized finance without stifling their potential benefits?

Efthimia Kefalea: Regulations need to be adaptable. Emerging technologies offer immense potential, and a principles-based approach, focusing on outcomes rather than prescriptive rules, creates a solid foundation for innovation. If regulatory frameworks remain technology-agnostic and emphasize market integrity and stability rather than rigid compliance measures, firms will have more flexibility to integrate new solutions. Our participation in the European Central Bank (ECB) Exploratory work on new technologies for wholesale central bank money settlement reinforced this. We saw firsthand that regulations can accommodate innovation, but close collaboration with regulators is essential. Continuous dialogue between market stakeholders and policymakers ensures clarity and facilitates an environment where emerging technologies can be safely adopted.

What strategies can be applied to ensure the rapid adoption of emerging technologies does not compromise systemic financial stability?

Systemic financial stability is at the core of what we do at Eurex Clearing. Regardless of the technology used, a strong risk management framework is paramount. We employ rigorous stress testing, continuous monitoring, and scenario analysis to anticipate and mitigate risks. For instance, during our work with ECB and BIS initiatives, we conducted extensive evaluations of risk exposure when integrating blockchain-based transactions with traditional financial systems. A phased, controlled approach to technology adoption, combined with regulatory oversight, helps ensure that stability is not compromised.

What are the biggest challenges facing the development of secure cross-border payment systems, and how can collaboration across regions address these?

High costs, slow transaction speeds, and fragmented regulatory environments are the biggest hurdles. Cross-border payments often involve multiple banking networks, regulatory checks and compliance requirements that vary by region. These inefficiencies make transactions costly and time-consuming. Initiatives like the BIS Agorá project, which brings together central banks and private sector financial institutions to create a unified ledger for cross-border payments, are critical in addressing these challenges. We are proud to be the only CCP participating in this project, working alongside other stakeholders to develop a more efficient global payments infrastructure. Regulatory harmonization and industry-wide collaboration will be essential to streamlining cross-border transactions.

How can institutions proactively identify and mitigate new cybersecurity and operational risks?

As a central counterparty, risk management is our daily business. We employ continuous security assessments, penetration testing and network monitoring to detect potential threats. Cybersecurity is an evolving challenge, and we work closely with regulators to ensure that our infrastructure remains robust. Employee training and awareness programs also play a crucial role – many security breaches result from human error, so fostering a culture of cybersecurity is just as important as deploying advanced threat detection systems. Additionally, at the group level, Deutsche Börse regularly conducts audits and implements stringent security controls to safeguard financial operations.

How can regulators and financial institutions work together to strike a balance between fostering innovation and maintaining public trust in the financial system?

Trust is the foundation of financial markets, and both regulators and market participants must work together to uphold it. Open dialogue and real collaboration between financial institutions, infrastructures and regulators are key. We have seen this in action with the non-objection approval we received from BaFin for DLT-facilitated collateral mobilization. When a CCP like Eurex Clearing enters a decentralized ecosystem, it brings market integrity and stability. The transition to new technologies will require parallel operation of traditional and decentralized systems, and CCPs are well-positioned to facilitate this. Regulators must continue to provide clear guidance while allowing room for market-driven innovation. A coordinated approach will ensure financial stability while enabling the adoption of transformative technologies.

As digital transformation accelerates, balancing innovation with risk management will be crucial. By fostering industry-wide cooperation, financial markets can evolve in a way that benefits all participants while maintaining security and trust.

Visit the panel at Derivatives Forum Frankfurt on 27 February from 10:25-11:10 CET

The innovation imperative: balancing progress and stability in finance

The panel will explore how leading financial institutions and regulators are navigating the delicate balance between driving technological advancement and maintaining financial stability.
 
-    The evolution of regulatory frameworks for emerging technologies, the future of cross-border payments, and risk management in a rapidly digitalizing world.
-    How to approach the challenges of innovation while safeguarding trust, security, and resilience in the financial sector?

Moderator: Patrick Scholl, Partner, Mayer & Brown

Speakers:

• Holger Neuhaus, Head of Market Innovation and Integration Division, ECB
• Stephan Mögelin, Lead Senior Officer, BaFin
• Danny Hand, Executive Director, Prime Financial Services Product Development, J.P. Morgan
• Efthimia Kefalea, Director, Collateral & Repo Clearing Design, Eurex Clearing
• Daniel Eidan, Adviser and Solution Architect, Bank for International Settlements (BIS)