What happened: The Financial Stability Board (FSB) issued policy recommendations to nonbank market participants to enhance liquidity preparedness for margin and collateral calls. The recommendations follow an FSB consultation published in April 2024 and cover:
- Liquidity risk management and governance
- Stress testing and scenario design
- Collateral management practices of nonbank market participants
Why it matters: The recommendations are principles-based and rely on nonbank counterparties to manage collateral and margin issues—an approach MFA recommended in our comment letter. Recommendations for market participants include:
- Incorporating the assessment of liquidity risks arising from margin and collateral calls in liquidity risk management and governance frameworks.
- Establishing contingency funding plans to ensure that liquidity needs arising from margin/collateral calls can be met.
- Regularly reviewing and updating of firms’ liquidity risk frameworks.
- Conducting liquidity stress tests to identify sources of potential liquidity strains caused by margin and collateral calls.
- Maintaining sufficient levels of cash and diverse liquid assets and establishing appropriate collateral arrangements to meet margin and collateral calls.
- Having active, transparent, and regular interactions with counterparties in collateralized transactions.
MFA on the issue: MFA urged the FSB against issuing prescriptive, “one-size-fits-all” nonbank liquidity risk management recommendations in a June 2024 comment letter. Our letter highlighted that regulators of exchanges, banks, and nonbanks currently possess ample tools to monitor the positions of market participants and can take steps to intervene where necessary. We expressed a similar view in our comments to the International Organization of Securities Commissions (IOSCO) consultation report on leveraged loans and CLOs last year.
What’s next: MFA will continue to engage with the FSB and other stakeholders to highlight how alternative asset managers manage risk throughout the economic cycle and serve as liquidity providers during times of stress. This includes the FSB’s ongoing work on leverage. A report on leverage is expected in the next few months.
Meanwhile: The CFTC’s Market Regulation Advisory Committee (MRAC), on which MFA is represented, met today and adopted a white paper with recommendations on the Treasury basis trade and effective risk management practices for collateral and margin liquidity. MFA leadership highlighted the critical role of basis traders in the Treasury markets and urged policymakers to address the insufficient time provided by the SEC for the implementation of mandatory clearing. The SEC’s rushed implementation timeline of this critical rulemaking could leave issues pertaining to processes, contractual agreements and infrastructure unresolved—jeopardizing the resiliency of the Treasury markets.
