Financial Stability Board publishes final report on liquidity preparedness for margin and collateral calls

The Financial Stability Board has published a final report on liquidity preparedness for margin and collateral calls. The report 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 analyzed recent incidents of liquidity stress, as well as completed a survey of financial authorities and feedback from industry stakeholder outreach events. Together, the FSB has found there is 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. The findings suggest that while margin and collateral calls are a necessary protection against counterparty risk, they can also amplify the demand for liquidity by market participants if they are unexpected in times of stress and affect a large enough part of the market. The increase in such calls can impact market participants differently depending on the size of positions and level of liquidity preparedness. The FSB also identified liquidity risk management and governance weaknesses of some market participants as key causes of their inadequate liquidity preparedness for margin and collateral calls.

The FSB's eight policy recommendations in this report cover: (i) liquidity risk management and governance; (ii) stress testing and scenario design; and (iii) collateral management practices of non-bank market participants, focusing on liquidity risks arising from spikes in margin and collateral calls, including under extreme but plausible stressed conditions. The FSB explains that the recommendations should be applied proportionately to the underlying risks of different non-bank market participants.

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