By Wenzhe Sheng, Senior Product Manager of Regulatory Tech at Clearwater Analytics.
The Financial Stability Board (FSB), the global sentinel of financial stability, recently released findings that have likely sent ripples of unease through insurers, pension funds and asset managers. According to the study, these firms now face the unsettling prospect of being labelled as harbouring “underlying vulnerabilities”. This label is primarily tied to their responses to margin calls during times of market turbulence.
The challenge for these non-bank financial institutions (NBFIs) in the so-called “shadow banking” sector, is that many are now investing in a much broader range of asset types than would have been the case when their incumbent operational systems were developed. To effectively predict, manage, and ensure that margin calls are met, efficient management of liquidity in an investment portfolio is paramount.
Nobody wants to get caught on the hop, as many UK pension funds were in the aftermath of the UK mini-budget crisis back in September 2022, with too many private market assets and insufficient liquidity to meet rising margin calls. In this sort of scenario, if investors are not able to easily view their entire portfolios due to information being scattered across the business, as can often be the case when relying on legacy systems or Excel spreadsheets, robust liquidity management becomes ten times more difficult.
The FSB’s recommendation serves as a reminder that the health of large institutional investors is incredibly tied up with the overall stability of the global financial system. It isn’t just the FSB that has looked into this topic either, the latest Solvency rules in the UK from the PRA set out similar themes, and over in Singapore the MAS has also recently published a paper that looks into the financial stability of NBFIs. This global regulatory scrutiny shouldn’t come as a surprise – after all, NBFIs’ portfolios now account for nearly half of global assets at roughly $218tn (FSB Global monitoring report on non-bank financial intermediation 2023. Despite this, many continue to manage these assets through outdated systems.
For institutions that do not want to fall foul of the recommendations set out by the FSB and other global regulatory bodies, there has to be a renewed focus on ensuring that they have real-time access to high quality data on their investment portfolios. This demands a strong and flexible data infrastructure built on modern cloud-based technology. For those NBFIs that continue to rely on legacy systems, the next market stress event could be the one that exposes the fatal flaws in their ability to meet their margin calls.
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