FSB guidance strengthens non-bank liquidity for margin calls
The Financial Stability Board (FSB) has published policy guidance to improve non-bank financial entities' ability to manage liquidity demands from margin and collateral calls. This follows identified weaknesses in liquidity risk management and stress testing practices within the non-bank financial intermediation (NBFI) sector.
Non-banks face liquidity gaps
Recent market turmoil, including the Archegos Capital collapse in 2021 and the UK's liability-driven fund stress in September 2022, underscored how rapid increases in margin and collateral requirements can amplify liquidity needs across the financial system.
The Financial Stability Board (FSB) identified key weaknesses in liquidity risk management, stress testing, and collateral practices within the non-bank financial intermediation (NBFI) sector.
These vulnerabilities stem from leverage, concentration risk, operational inefficiencies, and a lack of harmonised regulatory frameworks, exacerbated by market interconnectedness.
In response, the FSB published its report 'Liquidity Preparedness for Margin and Collateral Calls' in December 2024.
This guidance aims to improve NBFI entities' ability to manage liquidity demands from margin and collateral calls in derivatives and securities markets, covering a range of participants from insurance companies to hedge funds.
The overarching goal is to reduce systemic risks associated with liquidity shortfalls.
The FSB's policy recommendations complement existing international standards and are designed for proportional application by national authorities.
Eight pillars of preparedness
The FSB's recommendations focus on three key areas.
Firstly, **liquidity risk management** requires integrating margin and collateral call risks into governance frameworks, setting risk tolerances, and establishing regularly reviewed contingency funding plans.
Secondly, **liquidity stress testing** mandates regular tests with historical and hypothetical scenarios, considering idiosyncratic and market-wide shocks, and modeling asset liquidation impacts.
Thirdly, **collateral management** emphasizes operational resilience, timely availability, and transferability of sufficient and diversified collateral.
Market participants should maintain diverse liquid assets with appropriate haircuts and engage actively with counterparties to ensure mutual preparedness.
Crucial, but complex implementation
The FSB's guidance offers a crucial framework for addressing systemic liquidity risks in the non-bank sector, a timely response to recent market turmoil.
Its high-level nature means effective implementation relies heavily on national authorities adapting these principles proportionally.
Real impact depends on translating these recommendations into concrete, enforceable standards that genuinely enhance operational readiness.