Brussels, EU – MFA urged the Financial Stability Board (FSB) against issuing prescriptive, “one-size-fits-all” nonbank liquidity risk management recommendations in a comment letter submitted today. Additional liquidity risk management recommendations are unnecessary given the current regulatory frameworks for exchanges, banks, and nonbanks. The recommendations are in response to the FSB’s consultation report on liquidity preparedness for margin and collateral calls.
MFA supports strong collateral and margin liquidity risk management for nonbanks. However, the recommendations from FSB will encourage national regulators to enact prescriptive liquidity risk management rules for private funds. Nonbanks, including private funds, have diverse structures, strategies, and risk profiles. Any approach to liquidity risk management that fails to take into account the differences among nonbanks is not the appropriate solution and will harm markets by increasing volatility.
“Margin is a tool to manage and reduce leverage risk. Currently, prudentially regulated counterparties set margin and leverage requirements to prevent excessive risk,” said Jillien Flores, MFA Head of Global Government Affairs. “Applying a one-size-fits all margin framework to alternative asset managers is an ineffective approach. Alternative asset managers are subject to Dodd-Frank Act and AIFMD margin and leverage frameworks that require funds provide extensive liquidity risk reporting to regulatory authorities, including stress tests and liquidity management limits.”
The letter highlights that regulators already possess ample tools to monitor the positions of market participants and can take steps to intervene where necessary. In the UK and EU, regulations including the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive, and the Alternative Investment Managers Directive (AIFMD), impose extensive reporting requirements, leverage limitations, and specific rules on liquidity management limits and stress tests. In the US and EU, regulators collect extensive data from private funds that allows regulators to monitor for systemic risk events.
The letter also notes that the consultation fails to consider the important role that sell-side banks, as counterparties to NBFIs, and exchanges (CCPs) play in margin liquidity and collateral management. Many banks employ proprietary portfolio margin models to determine when to make margin calls or adjust rates. These models are often opaque and rely on subjective inputs. From the letter:
“In reality, dealers and CCPs are the drivers behind margin calls, as opposed to NBFI sector market participants, which play a passive role as margin call takers… Whilst there are certain publicly available portfolio margin models used by CCPs and dealers, dealers also employ proprietary portfolio margin protocols to determine when to issue margin calls or adjust margin rates. These protocols are important for the dealers to accurately predict liquidity constraints, but are typically opaque to the NBFI counterparty, and certain of the inputs may be subjective. As such, there is a predictability issue for NBFI sector market participants, who may not be able to accurately account for potential margin calls when they are not aware of when such calls may be issued and of any unexpected changes in margin amounts or collateral… [I]n a stress event participants do not have visibility over when the dealer makes a margin call, which can materially affect the participant’s liquidity and collateral management strategy. MFA is of the view that one area which the Report should consider in relation to the roles of sell-side entities, is whether recommendations should be made for dealers to provide greater transparency over their margin models, such that NBFI sector market participants which are on the receiving end of the margin calls are able to predict, and replicate, the outcomes of the banks’ margin models and tailor their collateral management system appropriately.”
Read the full comment letter here.
About the global alternative asset management industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of €5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About MFA
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over €3 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
