The collapse of Silicon Valley Bank (SVB) and Signature Bank and the acquisition of Credit Suisse by UBS are the latest in a series of shocks to have rattled financial markets. Some, like the failure of SVB, appear to be related to poor risk management combined with a high interest rate environment. Others, like the March 2020 dash for cash and the September 2022 gilt crisis, came about when external shocks triggered extreme price volatility followed by high margin requirements, a liquidity squeeze and widespread selling of assets, amplifying the impact and disrupting the functioning of core markets.
Regulators and central banks have been looking closely at the latter issue for some time, with the aim of shoring up potential vulnerabilities and identifying a set of tools to prevent this type of liquidity crunch from snowballing into a financial stability issue. Several regulatory workstreams are underway, including a review of margining practices that will explore levels of transparency in cleared markets, the liquidity readiness of market participants and the responsiveness of cleared and non-cleared initial margin models.
Firms themselves are also likely to be asking what steps they can take to inure themselves against future liquidity shocks. Part of the answer could be to further improve the operational efficiency of collateral management. While significant progress has been made in this space, some firms struggled to process the spike in margin calls in a timely way during the recent periods of stress because parts of the collateral management process are still subject to manual intervention. In response, ISDA is working with industry participants to encourage greater automation and data standardisation – changes that won’t prevent liquidity stresses from occurring, but could ease the pressure points and reduce operational risks when they do.
This issue of IQ explores some of the implications of the recent stress events, including the regulatory response and industry efforts to increase efficiency in collateral management processes. Both these issues will also feature prominently at this year’s ISDA Annual General Meeting in Chicago on May 9-11. It’s not too late to book your ticket at agm.isda.org, so we very much hope to see you in Chicago.
Documents (1) for Under Scrutiny – IQ April 2023
Latest
Key Trends in OTC Derivatives Market H2 2025
The latest data from the Bank for International Settlements over-the-counter (OTC) derivatives statistics shows an increase in notional outstanding of OTC derivatives during the second half of 2025 compared to the same period in 2024. Notional outstanding rose across all...
ISDA-SIFMA letter to SEC on Swap Dealer Thresholds
ISDA and SIFMA have submitted a comment letter to the SEC in response to the staff report on the definitions of “security-based swap dealer” and “major security-based swap participant.” The associations recommend maintaining the current de minimis thresholds for both...
ISDA responds to RBI consultation on SA-CCR
On July 1, ISDA responded to the Reserve Bank of India's (RBI) consultation on draft amendment directions on the standardized approach for counterparty credit risk (SA-CCR). ISDA broadly welcomes the RBI's move to SA-CCR and updated capital treatment for exposures...
Data Subject Access Request Form
Pursuant to its mission to promote safe and efficient markets within the over-the-counter (OTC) derivatives industry, The International Swaps and Derivatives Association, Inc. (ISDA) processes personal data of its employees, members and non-members (for example individuals attending ISDA conferences or...
