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Many of the underlying flaws seen in non-bank financial
institutions (NBFI) during the COVID-19 pandemic in March 2020
that forced central banks to inject liquidity into markets were
still largely in place, the FSB said in a report.
"Limits on data collection and disclosure mean that certain
aspects of NBFI leverage can be hidden," the FSB said.
"While insurance companies, pension funds and investment funds
represent two-thirds of NBFI assets, more than 90% of on balance
sheet financial leverage is in so-called other financial
intermediaries (OFIs), such as broker-dealers, hedge funds,
finance companies, holding companies and securitisation
vehicles," the report said.
Some hedge funds, especially in the United States, Britain and
European Union, use complex strategies that may embed
vulnerabilities that are difficult for counterparties and
regulators to assess quickly or unwind promptly, the FSB said.
"Within the hedge fund sector, there is a group of funds,
typically pursuing macro and relative value strategies, with
very high levels of synthetic leverage," it said.
Future policy work could include assessing if more rules are
needed for margin or cash that back derivatives and securities
financing transactions which connect hedge funds with prime
brokers, it said.
"One area to explore is whether prime brokers’ risk management
of exposures to leveraged non-bank entities could be enhanced,"
it said.
The main data gaps need addressing by improving the use of trade
repositories used for recording transactions, enhancing
reporting requirements for non-banks with high levels of
leverage, and expanding disclosure requirements, the FSB said.
Increasing the availability and use of central clearing for
government bond, cash and repurchase agreement, or repo, markets
could also make markets more resilient to shocks, it said.
The FSB has already proposed tougher rules to make open-ended
funds, a key part of the NBFI sector, more resilient in a market
crisis but is facing heavy opposition from industry.
(Reporting by Huw Jones; Editing by Tomasz Janowski)
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