Non-banks should hold more cash to cope with margin spikes: G20 watchdog

“Non-banks” such as insurers, hedge funds, family oces and commodities traders should hold sucient 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. 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 oce Archegos in March 2021 and the extreme volatility in commodities after Russia-Ukraine war 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.

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. They should also have sucient levels of cash and diverse liquid assets — meaning they can be sold to raise cash even in stressed markets, the watchdog added.