Bank of England wants more transparency for ‘non-banks’ after gilt turmoil

By Huw Jones

LONDON (Reuters) – Improving transparency of “non-banks” such as pension funds is a first step in applying lessons learned from the turmoil in Britain’s government bond market, Sarah said on Monday. Breeden, chief executive of the Bank of England.

The central bank had to intervene in UK bond markets in September after the £1.6 trillion liability driven investment (LDI) fund sector – used by pension funds to help secure future payments – struggled to meet collateral calls after the previous government’s tax cut plans triggered a market rout.

It shed light on the $200 trillion less regulated global “non-banking” sector, made up of pension funds, insurers and different types of investment funds, and spanning borders.

Breeden said LDI’s problems are reminiscent of the “systemic risks” posed by mismanaged leverage in the non-banking system where there is “too often” excessive risk-taking alongside poor management of leverage risk. liquidity.

“Transparency is an important first step. It enables the next necessary step to ensure that non-bank positions and interconnections with the rest of the financial system can be thoroughly tested and understood,” Breeden said during a event organized by ISDA, the body of the derivatives industry. and hedge fund industry body AIMA.

There have been many other examples of “systemic vulnerability” in non-banks, such as with money market funds and open-end funds when economies went into lockdown to fight COVID in March 2020, and the investment house Archegos failed in 2021, Breeden said.

In the case of Archegos, the individual counterparties had no view of the firm’s large and concentrated swap positions, and therefore banks and clearing houses need to have access to more information about their clients not banks to fully understand the risks, Breeden said.

“Let me be clear. The responsibility for building resilience in the non-banking system lies first and foremost with businesses themselves,” Breeden added.


Adequate liquidity buffers in nonbanks would significantly reduce the need for central bank intervention, and regulators will need to consider how best to ensure leverage is well managed, Breeden said.

This could include “general market-wide measures such as market regulations to ensure that excessive leverage is better controlled by market prices and margins,” she said.

Banks and non-banks also need to improve risk stress testing, she added.

Jiri Krol, global head of government affairs at AIMA, said there was a need to be smarter about measuring leverage, and a more holistic approach was needed from regulators. world, because it was “difficult to see the common thread”.

“We believe regulators need to get meaningful insights into financial stability monitoring and systemic risk management,” Krol said.

Toks Oyebode, executive director of regulatory affairs at JPMorgan bank, said the measures outlined by Breeden and other regulators, such as the margin, were timely.

A single country has limited influence over a global nonbank sector, but the G20 Financial Stability Board is due to report on nonbank vulnerabilities on Thursday and present international policy proposals.

“It will take time and effort. It’s really important that the FSB approaches this with vigor,” Breeden said.

(Reporting by Huw JonesEditing by Gareth Jones and Toby Chopra)

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