Policy recommendations aim to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets.
- Recommendations follow public consultation and focus on liquidity risks arising from spikes in margin and collateral calls, including during times of market-wide stress.
- Recommendations cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank market participants.
The Financial Stability Board (FSB) today published policy recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets (including securities financing such as repo).
The recommendations respond to calls for regulatory adjustments to deal with liquidity strains in the non-bank financial intermediation (NBFI) sector arising from spikes in margin and collateral calls during market stress. The recommendations are intended to build on and complement rules and regulations for liquidity risk management and governance that already exist in many sectors and jurisdictions.
Derivatives and securities activities can expose market participants to margin and collateral calls. Recent episodes of market stress, including the March 2020 market turmoil, the Archegos failure in March 2021, the 2022 turmoil in certain commodities markets, and the September 2022 issues experienced by many pooled liability-driven investment (LDI) funds, underscore the importance of margin and collateral calls to financial stability and the need for market participants to be prepared to meet these calls.
The FSB’s eight policy recommendations cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank market participants, focussing on liquidity risks arising from spikes in margin and collateral calls during times of market-wide stress. The recommendations cover both centrally and non-centrally cleared derivatives and securities markets and apply to a broad range of non-bank market participants that may face margin and collateral calls, including insurance companies, pension funds, hedge funds, other investment funds, and family offices.
Non-financial entities such as commodities traders can also have material derivatives and securities exposures. While the recommendations do not directly apply to such entities, they and their counterparties could use the recommendations to improve their liquidity management and governance practices.
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© FSB - Financial Stability Board
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