The Financial Stability Board (FSB) published a consultation report on liquidity preparedness for margin and collateral calls. The report sets out eight proposed 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).

In particular the report:

• Identifies weaknesses in risk management and governance as key causes of inadequate liquidity preparedness by some non-bank market participants during recent incidents of liquidity stress in financial markets.
• Proposes eight policy recommendations focused on managing and mitigating the impact of spikes in margin and collateral calls in the non-bank financial intermediation (NBFI) sector.
• Makes proposed recommendations cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank financial institutions.

The report highlights the need for policy adjustments to deal with liquidity strains in the NBFI sector arising from spikes in margin and collateral calls during times of market stress, such as the March 2020 market turmoil, Archegos, and the commodities markets turmoil and stress in liability-driven investment funds in 2022. To achieve this, the FSB is proposing eight high-level and cross-sectoral policy recommendations that build on and complement existing rules and regulations on liquidity risk management across different sectors and jurisdictions.

The 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. They apply to non-bank market participants that may face margin and collateral calls, including insurance companies, pension funds, hedge funds, other investment funds and family offices. They are proposed to apply proportionately with a focus on non-bank market participants with material exposures to spikes in margin and collateral calls during times of stress. The report also highlights the need for financial intermediaries in bilateral transactions with non-financial entities, such as commodities traders, to consider assessing their liquidity preparedness for spikes in margin calls and collateral during times of stress.

A copy of the consultation can be viewed here.