Under Scrutiny – IQ April 2023

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

ISDA Paper on FRTB Rules in Brazil

On March 24, ISDA submitted a paper to Banco Central do Brazil’s (BCB) on its implementation of the revised market risk framework under the Fundamental Review of the Trading Book (FRTB), which represents an important step toward strengthening prudential standards...

IQ Interview with Mark Uyeda

Mandatory clearing of US Treasury securities is due to begin at the end of this year under rules finalized by the Securities and Exchange Commission (SEC) in 2023. SEC commissioner Mark Uyeda talks to IQ about the benefits of clearing...

Response to FCA on CFI Codes for Transparency

On March 19, ISDA responded to Chapter 3 of the UK Financial Conduct Authority’s (FCA) Quarterly Consultation CP26/8 on transparency requirements for financial instruments under Market Conduct Sourcebook (MAR) 11. Sections 3.11-3.13 of the consultation paper explain a discrepancy between...

Why We Need Safe and Efficient SFT Markets

Securities financing transactions (SFTs) play a vital role in fostering liquidity, mobilizing collateral and supporting the smooth functioning of derivatives markets. But during periods of stress, secured funding markets often come under pressure just when they’re needed most, with reduced...