Liquidity Preparedness for Margin and Collateral Calls - Consultation report

Recommendations 4 and 5: liquidity stress testing and scenario design Recommendation 4 sets out the need for conducting liquidity stress tests with respect to margin and collateral calls to identify the sources of liquidity strains and ensure the calibration of adequate, diverse and reliable sources of liquidity and collateral, consistent with the market participants’ risk appetite. [...] The FSB’s NBFI progress report notes that such a sudden increase in liquidity demand to meet margin and collateral calls can contribute to the transmission of stress to other parts of the financial system and the real economy.4 The BCBS-CPMI-IOSCO review recommended that the FSB undertake additional international work on enhancing liquidity preparedness of market participants and on regulatory dat. [...] Objective and scope The overarching objective of the FSB’s work on liquidity preparedness for margin and collateral calls is to reduce excessive procyclical behaviour of market participants in response to margin and collateral calls during times of market-wide stress, both by enhancing market participants’ liquidity preparedness and by strengthening the ability of authorities to monitor and manage. [...] Section 3.2 proposes the following stress testing and design recommendations for non-bank market participants: ■ Recommendation 4 sets out the need for conducting liquidity stress tests with respect to margin and collateral calls to identify the sources of liquidity strains and ensure the calibration of adequate, diverse and reliable sources of liquidity and collateral, consistent with market part. [...] Liquidity risk management practices and governance Existing rules and regulations cite a number of fundamental components of robust liquidity risk frameworks, which include the need for a liquidity risk strategy, a clearly defined liquidity risk appetite, metrics and tools to measure liquidity risks, systems and controls to monitor and report liquidity risks, liquidity stress-testing and scenario.