Hedge funds advised to strengthen liquidity preparedness for margin and collateral calls

The Monetary Stability Board (FSB) has launched a session report highlighting the necessity for coverage changes to handle liquidity strains within the non-bank monetary intermediaries (NBFI) sector – akin to hedge funds – notably in periods of heightened margin and collateral calls amidst market stress.

Reflecting on previous cases such because the March 2020 turmoil, Archegos incident,  and stress in liability-driven funding funds in 2022, the report underscores the influence of such occasions on liquidity dynamics throughout the NBFI sector.

In response, the FSB has outlined eight coverage suggestions geared toward strengthening the liquidity preparedness of non-bank market individuals for margin and collateral calls throughout each centrally and non-centrally cleared derivatives and securities markets, together with securities financing akin to repo.

The primary three suggestions deal with enhancing liquidity threat administration practices and governance. These embody the incorporation of liquidity threat stemming from spikes in margin and collateral calls into present frameworks, establishing liquidity threat appetites, and conducting common opinions to make sure effectiveness, notably throughout instances of stress.

Suggestions 4 and 5 centre on liquidity stress testing and situation design, emphasising the significance of tailor-made stress exams to determine liquidity strains and the inclusion of maximum but believable eventualities.

The following suggestions, six to eight, focus on collateral administration practices. This entails guaranteeing resilient operational processes, sustaining satisfactory ranges of money and liquid property, and fostering clear engagement with counterparties and repair suppliers.

FSB’s report highlights the crucial stability between margin and collateral calls as vital threat administration measures and their potential to amplify liquidity demand in periods of stress. It identifies liquidity threat administration and governance weaknesses as key elements contributing to insufficient liquidity preparedness amongst market individuals.

These suggestions are being proposed to be utilized repeatedly, with a deal with non-bank market individuals with important exposures to margin and collateral calls throughout stress occasions.

The FSB is now looking for suggestions on the session report and the outlined suggestions, with submissions welcomed till 18 June 2024.