G20 watchdog says 'non-banks' should hold more cash to cope with margin spikes

"Non-banks" such as insurers, hedge funds, family offices and commodities traders should hold sufficient cash and draw up contingency plans for coping with spikes in collateral used to back derivatives positions against default, the G20's financial watchdog proposed on Wednesday. Non-banks account for nearly half of the world's financial system, and in the latest sign of how the sector is being more closely scrutinised, regulators want to avoid a repeat of central banks having to inject liquidity into markets to help funds of various types.

"Non-banks" such as insurers, hedge funds, family offices and commodities traders should hold sufficient cash and draw up contingency plans for coping with spikes in collateral used to back derivatives positions against default, the G20's financial watchdog proposed on Wednesday.

Non-banks account for nearly half of the world's financial system, and in the latest sign of how the sector is being more closely scrutinised, regulators want to avoid a repeat of central banks having to inject liquidity into markets to help funds of various types. This happened during the "dash for cash" in March 2020 when economies went into lockdown to fight the COVID-19 pandemic, hitting money market funds, and after Britain announced unfunded tax cuts in September 2022, leaving liability-driven investment funds struggling to meet additional margin calls

The collapse of family office Archegos in March 2021 and the extreme volatility in commodities after Russia invaded Ukraine also showed how some non-banks are poorly prepared to handle surges in margin calls, the Financial Stability Board (FSB) said. "The FSB identified liquidity risk management and governance weaknesses of some market participants as key causes of their inadequate liquidity preparedness for margin and collateral calls," the watchdog said in a report setting out policy recommendations for public consultation.

They include embedding the ability to cope with collateral spikes in a non-bank's liquidity risk management and governance. Non-banks should have contingency funding plans to ensure additional liquidity needs can be met, and conduct liquidity stress tests to identify where strains can emerge, the FSB said. Non-banks should also have sufficient levels of cash and readily available and diverse liquid assets - meaning they can be sold to raise cash even in stressed markets, the watchdog added.

The FSB, made up of treasury officials, central bankers and regulators from the Group of 20 countries, sets out policy measures that G20 countries commit to applying. The measures aim to reinforce often vague or patchy rules at present, in contrast to defined liquidity requirements faced by banks, which are also being questioned after the collapse of several U.S. regional banks last year.

There are no specific rules related to margin and collateral calls under solvency rules for insurers in Britain and the European Union, for example, the FSB said. Leverage hedge funds face minimal directly applicable liquidity risk rules.

In a sign of how the non-bank net is being widened, the FSB said that commodities traders are also not subject to the same liquidity requirements as banks.

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