The Financial Stability Board (FSB) has issued a set of policy recommendations aimed at improving the liquidity preparedness of non-bank market participants. These recommendations are designed to help these entities manage margin and collateral calls in both centrally and non-centrally cleared derivatives and securities markets, including securities financing such as repos.
The new guidelines respond to demands for regulatory changes to address liquidity challenges within the non-bank financial intermediation (NBFI) sector, which arise from sudden increases in margin and collateral calls during periods of market stress. The FSB's initiative seeks to enhance existing rules on liquidity risk management and governance across various sectors.
Recent instances of market turbulence, such as the March 2020 turmoil, the Archegos collapse in March 2021, disruptions in commodity markets in 2022, and issues faced by many pooled liability-driven investment funds in September 2022, highlight the critical role of margin and collateral calls for financial stability. These events underscore the necessity for market participants to be adequately prepared for such demands.
"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," states the organization. These suggestions target liquidity risks linked to increased margin and collateral demands during widespread market distress. They apply broadly to insurance companies, pension funds, hedge funds, other investment funds, family offices, and others who may encounter such calls.
While these recommendations do not directly address non-financial entities like commodities traders with significant derivatives exposure, they can still benefit from adopting improved liquidity management practices inspired by these guidelines.
This initiative is part of the FSB's ongoing efforts to bolster NBFI resilience. It follows a review conducted in 2022 by several international bodies that called for enhanced international work on liquidity preparedness among market participants. The public consultation process on these proposals began in April 2024.
The FSB plays a crucial role internationally by coordinating national financial authorities' efforts and setting effective policies for financial stability. It includes representatives from 24 countries' national authorities responsible for financial stability along with various international organizations.
Klaas Knot serves as Chair of the FSB while its Secretariat operates out of Basel under the Bank for International Settlements' auspices.