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Global policymakers are proposing measures to shore up the shadow banking sector’s ability to maintain liquidity in times of market stress.

In a report, the Financial Stability Board (FSB) cited weaknesses in risk management and governance arrangements as central causes of liquidity troubles at certain non-bank financial institutions.

Liquidity issues have arisen at certain firms during episodes of heightened stress — such as during the pandemic-induced market turmoil, when hedge fund giant Archegos failed, and when liquidity mismatch pressures intensified as interest rates spiked — which drove margin and collateral calls.

In response, the FSB has proposed a set of policy recommendations for managing and mitigating the impact of liquidity stresses in the shadow banking sector. The recommendations include enhancing liquidity risk management and governance, and improving stress testing and collateral management practices.

The proposed recommendations apply to non-banks that may face margin and collateral calls, including investment funds, hedge funds, insurance companies, pension funds and family offices.

Additionally, the report highlighted the need for financial firms that engage in bilateral transactions with non-financial firms, such as commodities traders, to review their ability to cope with margin calls and collateral calls during stressed markets.

The proposals are out for consultation until June 18.