On 17 April 2024, the Financial Stability Board (FSB) published a consultation report that sets out 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 FSB has published these recommendations as it believes that policy adjustments need to be made to deal with liquidity strains in the non-bank financial intermediation sector following spikes in margin and collateral calls during times of market stress such as the commodities markets turmoil and stress in liability-driven investment funds in 2022.

Market participants in scope of the recommendations cover a broad range of non-bank financial entities that may face margin and collateral calls, including insurance companies, pension funds, hedge funds, other investment funds and family offices. Commercial banks and financial market infrastructures are excluded from the scope of the proposed policy recommendations.

The eight policy recommendations, which are intended to reinforce or complement existing rules and guidance, are:

  • Recommendation 1 – sets out the need to include liquidity risk arising from exposures to spikes in margin and collateral calls in liquidity risk management and governance frameworks.
  • Recommendation 2 – sets out the need for establishing liquidity risk appetites for margin and collateral calls as well as contingency funding plans to ensure liquidity needs can be met.
  • Recommendation 3 – sets out the need for regular reviews of liquidity risk frameworks to ensure on-going effectiveness in mitigating liquidity risk exposures to spikes in margin and collateral calls, including during times of stress.
  • Recommendation 4 – sets out the need for conducting liquidity stress tests with respect to margin and collateral calls to identify the sources of liquidity strains and ensure the calibration of adequate, diverse and reliable sources of liquidity and collateral, consistent with market participants’ risk appetite.
  • Recommendation 5 – calls for liquidity stress tests to cover a range of extreme but plausible scenarios, including both backward-looking and hypothetical.
  • Recommendation 6 – sets out the need for resilient and effective operational processes and collateral management practices.
  • Recommendation 7 – sets out the need for sufficient levels of cash and readily available and diverse liquid assets and collateral arrangements to meet margin and collateral calls.
  • Recommendation 8 – sets out the need for active, transparent, and regular interactions with counterparties and third-party service providers in collateralised transactions.

In addition to the policy recommendations, the FSB adds that non-bank market participants’ overall liquidity risk management and governance frameworks – including operational processes and liquidity stress testing and collateral management practices – should be well-documented and convey all necessary information that relevant authorities may request to review in the exercise of their oversight and supervisory functions.

Annex 2 to the consultation report provides some examples of existing or in-train liquidity risk management rules and regulations relevant to margin and collateral calls. Annex 3 provides some illustrative examples for the policy recommendations, which can serve as helpful guidance.

The deadline for comments on the consultation report is 18 June 2024.

Other internal FSB work to be carried out in 2024 will address the strengthening of authorities’ ability to monitor financial stability risks associated with inadequate liquidity preparedness for margin and collateral calls.