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FSB publishes new “liquidity preparedness” proposals for hedge funds

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The Financial Stability Board (FSB) has proposed a new package of measures aimed at helping hedge funds and other non-banking sector investors better cope with with margin and collateral calls in times of market stress, according to a report by Bloomberg.

The FSB has published draft recommendations in a new consultation report it says will improve the “liquidity preparedness of non-bank market participants in centrally cleared derivatives and securities markets (including securities financing such as repo)”.

The eight “high-level and cross-sectoral policy recommendations” cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank market participants, focusing 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, and are proposed to apply proportionately.

The report cites instances including the March 2020 market turmoil, the collapse of Archegos, and the commodities markets turmoil and stress in liability-driven investment funds in 2022, as highfaluting 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.

THE FSB, which is seeking comments on the report, says the proposed measures build on and complement existing rules and regulations on liquidity risk management across different sectors and jurisdictions.

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