In recent remarks, the FSB Secretary General addressed the issue of leverage in non-bank financial intermediation (NBFI), emphasizing its significance for financial stability. He reflected on a previous speech to ISDA about regulating crypto and drew parallels to current discussions on leverage. "I think our recent leverage consultation also constitutes a similar key moment," he stated, highlighting the need for guardrails around leveraged trading as financial markets grow.
The FSB conducted a consultation on managing risks from leveraged positions, receiving 36 responses. The Secretary General noted that leverage is crucial for risk management but can amplify harm when markets falter. "Leverage is very widely used for risk management and for arbitraging away the differences between markets," he explained.
Respondents urged clarity on targeted markets and expressed concerns over broad policy applications. The Secretary General acknowledged these points, stating, "It is also important, as a next step, to allow jurisdictions to reflect on what are their core markets."
A notable response questioned using gross notional leverage measures without differentiating hedging from directional positions. The Secretary General recalled past discussions with IOSCO and suggested that understanding total market leverage is essential.
On focusing only on large hedge funds, he referenced ESMA's stance against ignoring small entities' potential threats. "Our focus is not on hedge funds; it's on a particular kind of trading irrespective of who does it," he clarified.
The discussion highlighted data needs and public disclosure's role in risk management. Respondents also pointed out challenges in balancing commercial confidentiality with necessary bilateral disclosures.
Regarding margins and haircuts, ongoing considerations remain without preemptive recommendations. The Secretary General emphasized data's role in determining rules or practices needed.
Finally, respondents suggested waiting for existing initiatives' effects before further action. Acknowledging this point's merit, the Secretary General noted jurisdictional adaptations would take time.
Concluding his remarks, he stressed leveraging benefits within safety guardrails as crucial progress: "We will have taken a huge step forward in empowering markets to finance public policy and private entrepreneurship resiliently."