Global regulators want to better prepare funds for margin calls

GLOBAL regulators proposed a package of measures to ensure hedge funds and other investors from outside the banking sector are better able to cope with margin and collateral calls in times of market stress.

The Financial Stability Board (FSB) published draft recommendations on Wednesday (Apr 17) for improving the liquidity preparedness of such participants in centrally and non-centrally cleared derivatives and securities markets, including repos. They focus on risk management and governance, stress-testing and collateral.

The FSB said funds should conduct liquidity stress tests for a range of “extreme but plausible” scenarios caused by changes in margin calls. Collateral should be held in sufficient quantity after taking account of potential haircuts and be operationally ready for use during times of stress, it said.

Regulators spent more than a decade after the 2008 credit crunch shoring up lenders’ financial strength, yet a series of shocks outside the banking sector have since put a spotlight on other risks.

The FSB, which brings together authorities from around the world, cited turmoil at the outset of the pandemic, the collapse of family office Archegos, volatility in commodity markets after Russia’s invasion of Ukraine and stress in UK funds in 2022.

The FSB said it wants to “reduce the excessive pro-cyclical behaviour” that insurers, pension funds, hedge funds and other investment funds as well as family offices might exhibit in response to margin and collateral calls.

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In a report, the watchdog also cited the need for financial intermediaries dealing with commodity traders to consider assessing their liquidity preparedness.

The watchdog said responses to its proposals should be submitted by Jun 18. BLOOMBERG