## EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS ## Source details **Canonical URL:** [EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS](https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1gbrea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1gbrea2022004.pdf.json) --- ### Overview and scope - FSAP focused review of non-banks in the United Kingdom and systemic liquidity covering five areas: (i) overall NBFI system, links to banks and rest of world; (ii) NBFI direct lending to the U.K. economy; (iii) Sterling investment funds (OEFs, AIFs, and MMFs); (iv) CCPs; and (v) Systemic liquidity. - NBFIs defined as all non-deposit-taking corporations with limited coverage: Pension Funds and Insurance Companies to the extent they lend to the economy and interact with CCPs; Investment funds only to the extent of Sterling Funds; and broker-dealers only to the extent they interact with CCPs. - Regulatory aspects covered in a parallel Technical Note (TN). ### Size, structure, and global importance - NBFIs are very large and heterogeneous: insurers, pension funds, various investment funds, finance companies, money lenders, broker-dealers, CCPs. - Slightly more than a half of total financial assets is held by NBFIs. - Non-banks hold: - a third of corporate bonds, - a third of corporate loans, - nearly a half of unsecured consumer loans. - A third of non-banks’ assets are located offshore. - U.K. is the largest net exporter of financial and insurance services (as percent of GDP) in the world (mostly commission and fee-based income). - Market role: - A third, and in some products even a half, of the world’s currencies and derivatives are traded and cleared in London. - U.K. CCPs clear a variety of products and serve clients across the globe (clearing members in 23 countries). ### Interlinkages, functions, and funding - NBFIs interact with and rely on banks via trading and market-making, brokerage, and wholesale funding. - Several non-bank lenders use bank credit lines and securitization for funding; some NBFIs are directly owned by banks. - Lending cycles of banks and non-banks are largely synchronized; however, in stress tests non-bank lending appears less procyclical than banks. - Investment managers and CCPs can materially impact market liquidity during downturns; data gaps limit precise evaluation. ### Key findings from the Covid-19 shock - March 2020 “dash-for-cash” severely tested U.K. core liquidity markets. - Short-term interbank markets weathered the shock relatively well (supported by the SMF); sterling Gilts, commercial paper, corporate bond, and FX markets experienced greater pressures: bid-offer spreads widened, market pricing indicators were stretched, dealers rationed liquidity to NBFI customers because of balance sheet constraints. - Drivers of liquidity stress: - Some NBFIs were unprepared for sharp price moves and volatility and struggled to raise liquidity for margin calls and fund outflows. - Dealers’ balance sheet constraints insulated dealers from distress but increased stress in markets by limiting intermediation. - BOE and other central bank actions: - BOE stepped up lending and front-loaded Gilts purchases to absorb securities supply from NBFI investors. - Coordinated FX liquidity provision operations reduced FX funding pressures. - Joint BOE/HMT financing facilities met U.K. end-user firms’ funding needs. - Interventions quelled pressures relatively quickly but involved significant expansion of the BOE’s balance sheet. ### Assessment of BOE operational framework - Sterling Monetary Framework (SMF) provides liquidity insurance to banks, building societies, financial market infrastructures and designated investment firms. - SMF participation has grown since the 2016 FSAP; a Resolution Liquidity Framework (RLF) was introduced to support firms in resolution. - SMF catered well to banks and core intermediaries during Covid-19, but flow-through to wider markets was constrained by intermediaries’ balance sheet willingness and capacity. ### Data gaps and analytical limits - Data limitations prevent accurate quantification of: - liquidity of asset managers’ holdings and ability to project investors’ future liquidity demands; - certain non-bank lending (e.g., buy-now-pay-later schemes and some corporate loans) outside the regulatory perimeter. - During March 2020, variation and initial margins at U.K. and global CCPs increased sharply; some clients were unprepared though clearing members met margin calls. ### Main policy conclusions and recommendations - Strengthen NBFI liquidity resilience: regulators (U.K. and globally) need to enhance NBFI liquidity regulation. - Broaden BOE toolkit and access to liquidity: - Allow some NBFIs more direct access to BOE liquidity (options include asset purchase and lending facilities within SMF or separate framework). - Consider backstops for non-U.K.-based important NBFIs active in sterling markets either directly or via their home country central bank. - Improve BOE market operations and intelligence: - Consider use of clearing in repo operations. - Enhance liquidity certainty with regular short term repo operations, particularly when asset purchases are being phased out. - Leverage high frequency detailed trading data on sterling bonds. - Enhance intermediaries’ capacity to transmit liquidity: - Supervisors could examine flexibility of capital allocation frameworks to ensure usable buffers at business-unit level providing market funding and market-making. - Manage moral hazard carefully: - If more direct BOE access is offered to NBFIs, design features should mitigate moral hazard (emphasize market backstop role, clearer statements on nature and beneficiaries of support, access fees, tighter ex-ante regulatory requirements). - Address data gaps: - Improve data on NBFI holdings, liquidity profiles, and direct lending to enable better stress analysis and policy design. *Source: EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS, United Kingdom FSAP (IMF).* --- ### CONTINUING DATA IMPROVEMENTS AND PRIORITY RECOMMENDATIONS ### Main recommendations (selected with priority and timeline) - Continue reducing the size of unidentified exposures in experimental statistics on NBFI balance sheets (Who-to-whom data by ONS). (¶3, ¶6) - Priority: Medium - Timeline: MT - Collect or systematize collection/reporting of data for all Sterling holdings by all investors, including each NBFI, to analyze concentration in key sterling markets (equity, corporate bonds, CPs, Gilts). (¶5) - Priority: High - Timeline: MT - Analyze lending behavior of different types of NBFI under stress, including implications for lenders’ solvency and liquidity. (¶16-18) - Priority: Medium - Timeline: MT - In collaboration with international regulatory community, collect/analyze: - liquidation needs of asset managers under stress (redemptions, variation and initial margin, leverage, financing), - liquidity profile of holdings of asset managers during stress. (¶24-26) - Priority: High - Timeline: MT - Incorporate observed fund actions (deleveraging, cash hoarding) in system-wide financial stability simulations. (¶28, ¶30, ¶34) - Priority: High - Timeline: MT - For MMFs, decouple manager obligations to impose fees and gates from regulatory thresholds for minimum liquid assets, while requiring managers to act in investors’ best interests. (¶39) - Priority: Medium - Timeline: MT - Coordinate supervisory stress testing of CCPs with stress tests on CCP-clearing members and clients; report aggregate measures of CCP stress liquidity demands; augment transparency of CCP stress liquidity demands. (¶46-47) - Priority: High (coordination and reporting) - Priority: Medium (transparency) - Timeline: MT - Investigate use of cleared Gilt repo operations and offer regular short term repo operations. (¶81-82) - Priority: Medium - Timeline: MT - Develop capacity to monitor Gilt and Sterling corporate bond trading flows to complement BOE market intelligence. (¶83) - Priority: High - Timeline: NT - Consider allowing appropriately regulated and systemically interconnected NBFIs access to some repo and/or Gilt purchase operations in times of stress. (¶88-91) - Priority: High - Timeline: NT - Develop and clearly communicate BOE terms for liquidity provision to eligible NBFIs including objectives, markets, instruments, eligible participants, exit criteria. (¶94-96) - Priority: High - Timeline: NT - Ensure supervisory expectations of U.K. regulated intermediaries do not excessively constrain firms’ ability to manage internal allocation of capital and liquidity in times of stress. (¶80) - Priority: Medium - Timeline: NT (Note: NT = Near Term (now to one year); MT = Medium Term (within 1 to 3 years)) ### Data gaps and measurement issues - Experimental statistics first published by ONS in October 2020 are an important first step, but granular domestic and foreign non-bank data are missing and reported as not identified. (¶6) - Lack of comprehensive data on holdings of Sterling assets limits assessment of investor concentration and liquidation pressure. (¶7) - Data gaps for non-banks are largely an international issue; engagement with international regulators is needed. (¶8) *Source: 1gbrea2022004 - 2. Continue reducing the size of unidentified exposures in experimental (IMF staff technical note excerpts).* --- ### LENDING UNDER STRESSED CONDITIONS AND NON-BANK PROCYCLICALITY ### Key simulation findings - Under the recessionary “scarring” scenario, non-bank credit contracts less and resumes growth faster than bank credit. - Under tightening global financial conditions scenario, non-bank lending contracts less and is more countercyclical than bank lending. - Unemployment rate projections contribute minimally to non-bank lending dynamics: in the scarring scenario, unemployment rate in 2022/2021 contributes countercyclically only 0.06 percent, compared to lending decline of 1.5 percent. - Analysis would be more informative by NBFI type, but limited data prevent this. ### Determinants of direct lending by NBFIs (estimated regression) - Conceptual drivers included: Slope (term premium), EqYield (returns on stocks), BL (bank loans), real GDP (income), UR (unemployment rate). - Estimated least squares relationship (quarterly data 2007: Q1 to 2021: Q1; 80 observations; explains 61 percent of variation): - gNBL_t = 0.78*** gGDP_{t-1} + 0.36*** gBL_{t-4} – 2.67*** Slope_t – 0.15*** EqYield_t + 0.79*** UR_t - Standard errors shown as: (0.29) (0.14) (0.66) (0.04) (0.21) - Interpretation: - NBFI lending is encouraged by declining stock returns and long-term yields, income growth, and bank lending (with a lag). - NBFIs act as substitute lenders for household loans during rising unemployment. ### Data limitations and recommendation - Aggregate lending statistics for insurers, pension funds, OFIs, finance companies are annual; some lenders not captured (fintech consumer credit, employer salary advance schemes). - Line-by-line fund holdings and liquidity data for OEFs are available only annually or semi-annually with reporting delays up to four months; U.K. MMFs have additional quarterly line-by-line holdings under U.K. MMFR. - Recommendation: Authorities encouraged to analyze lending behavior by each NBFI type under stress and assess implications from losses across non-bank types; may require global follow-up. ### Asset management sector size and systemic links - Asset management industry size as of end-2020: £11 trillion (assets under management). - Industry contributes around 1 percent of the United Kingdom’s GDP and employs 114,000 people (42,200 directly). - Many funds used by U.K. investors and/or investing in U.K. assets are domiciled outside the U.K., complicating systemic-risk evaluation and necessitating international data sharing and regulatory consistency. *Source: 1gbrea2022004 - 18.* --- ### MONEY MARKET FUNDS, OPEN-ENDED FUNDS, AND AIFS: LIQUIDATION NEEDS, MISMATCH, AND TOOLS ### MMF stress episode and stress-test results - BOE estimates total outflow from Sterling MMFs in March 2020 ~ 25 billion GBP. - MMFs largely did not use liquidity buffers in March 2020; they lowered maturity of holdings to avoid breaching buffers. - Stress test of Sterling MMFs under a weekly redemption shock: Total liquidation needs = £22 billion. - Table highlights (values in £ billions; MMF portfolio reference date April 9, 2021): - Total Liquidation Needs (by asset class): Treas 0.29, Govt 0.02, Repo 5.05, CD 8.24, CP 3.64, ABCP 0.49, TD 3.54, Other 0.75, Total 22.0 - Total assets Prime: Total 231.0 (Treasure 3.30, Govt 0.33, Repo 42.23, CD 88.13, CP 41.22, ABCP 7.10, TD 37.90, Other 10.76) - % Liquidation Needs Prime (by asset class): Treas 4.8%, Govt 6.2%, Repo 10.5%, CD 9.3%, CP 8.8%, ABCP 6.9%, TD 9.3%, Other 6.9%, Total 9.2% - Total Liquidation Needs by maturity bucket: 1 day 8.10, 2-7 days 1.97, 8-30 days 2.43, 31-60 days 2.70, 61-90 days 2.76, 91-180 days 3.07, 181-365 days 0.98, Total 22.0 ### Open-ended funds (OEFs) and AIFs: data and vulnerabilities - OEF supervisory holdings data exist but only annually or semi-annually with delays up to four months; liquidity characteristics not available. - Fixed income and equity OEFs appear largely unleveraged; monthly-frequency data limit stress test granularity. - Fixed income funds hold approximately 38 percent of total holdings in BBB bonds, exposing them to systemic downgrades. - AIFMD provides quarterly information on leverage, counterparties, portfolio sensitivities, and asset liquidity for AIFs, but some funds have complicated leverage, borrowing, and liquidity profiles. - Hedge funds borrow largely via repos and prime brokers, suggesting vulnerability to increases in funding costs. ### Liquidity mismatch and stressed losses (AIFMD Q4 2020 analysis) - Aggregate liquidity mismatch is limited except for Real Estate Funds across horizons and Funds of Funds at the 0–1 day horizon. - Stress inputs: - Interest rate shocks matched observed changes to US Treasury rates between February 18 and March 9, 2020. - Credit spread shocks matched observed changes for ICE BofA corporate indices between March 9 and March 20, 2020. - Aggregate results: losses moderate; biggest loss ~ 2% of asset value for hedge funds in <5-year credit spread bucket. - Leverage measure (risk-based): ratio = (sum of absolute DV01/CS01 for short and long positions) / (absolute value of net DV01/CS01). - Example: gross DV01 ≤5-year = 68 million; net DV01 = 17 million; leverage = 4. - Hedge funds show highest leverage in credit-sensitive assets >15 years – leverage ratio over 10, but CS01 magnitudes small relative to assets under management. - Aggregation caveat: individual funds’ leverage and liquidation needs may differ materially. ### Swing pricing and liquidity management tools - Joint BOE/FCA study (2021): fund managers used swing pricing frequently but inconsistently during Covid crisis. - FPC judgment (March 2021): swing pricing calculation and application could be enhanced to better address first-mover advantage risks. - FCA proposed frameworks: - lengthening redemption periods for property funds, - new LTAF structure with infrequent redemption periods and notice periods to align redemptions with asset liquidity. - Recommendations: - In collaboration with international community, collect data to analyze asset managers’ liquidation needs and liquidity profiles. - Incorporate observed fund actions (deleveraging, cash hoarding) in system-wide financial stability simulations. - For MMFs, decouple manager obligations to impose fees/gates from regulatory minimum liquid assets thresholds while ensuring managers act in investors’ best interests. *Source: IMF staff calculations and AIFMD Q4, 2020 content in unit 1gbrea2022004.* --- ### CCP STRESS-TESTING, TRANSPARENCY, AND BOE OPERATIONAL FRAMEWORK ### CCP stress-testing recommendations - Coordinate supervisory stress testing of CCPs with stress tests on CCP clearing members and clients so results can inform each other. (¶46) - Report aggregate measures of CCP stressed liquidity demands on clearing members and clients as part of supervisory stress-test outputs. (¶47) - Augment transparency of CCP stressed liquidity demands towards clearing members and clients. (¶47) ### Evaluation of BOE proposed CCP stress-testing framework - Risk coverage: covers credit and liquidity risks and concentrated positions; suggestion to combine with regulatory constraints on clearing members and clients to assess systemic resilience. - Frequency: annual exercise launched Q4 and ending by end-Q2; improvement over irregular schedules. - Methodology: credit and liquidity stress testing using market shocks and member default scenarios; BOE prescribes market stress shocks and runs validations and plausibility checks on CCP submissions. - Market shock scenarios: uses historical, CCP scenarios, hypothetical and empirical approaches; four scenarios used in practice. - Reference date: Bank’s 2021–22 exercise uses reference date of September 17, 2021. - Defaulter assumptions: considers extensions of cover 2, system-wide approaches, characteristic-based and statistical-based approaches. - Disclosure: suggested metrics include drawdown of CCP resources, source of losses and outflows, diversification of stress losses and liquidity inflows, scenario comparison, qualitative measures; potential improvement to disclose stress CCPs may impose on clearing members/clients (variation/initial margin impacts, pre-funded and assessment portions of guarantee funds). ### BOE Sterling Monetary Framework and developments - As of February 2021, SMF available to around 218 participants. - Eligible participants include banks, building societies, broker-dealers, CCPs, and international central securities depositories; number of participants grew from 175 in 2016 to around 219 in 2021. - BOE liquidity facilities include standing facilities, ILTR, DWF, ELA, RLF, FX lending operations, APF operations. - Reserve balances: 905 billion GBP (~45 percent of GDP) held in deposit accounts of SMF participants attracting Bank Rate. - DWF: scalable backstop funding secured on broad collateral priced on sliding scale over Bank Rate depending on volume. - RLF established October 2017 to provide temporary liquidity support to firms in resolution; BOE can request HMT indemnity and recover losses from industry in line with FSB guidance. ### Impact of Covid-19 and BOE operations - Timeline: increased volatility early March 2020; pressures continued through first half of March 2020. - Money and repo markets: sterling interbank liquidity reduced; repo market prices elevated longer than unsecured SONIA market. - Key BOE operations and measures: - ILTR: six month operation moved to weekly frequency from 2019; volumes increased during stress. - CTRF: launched 24 March 2020; repos were 3 months at a fixed price of 15 basis points over Bank Rate; demand for “Level A” collateral (primarily Gilts) was elevated. - Corporate Covid and SME facilities: CCFF purchased corporate paper; TFSME provided four then six-year funding; facilities open until March 2021 and October 2021 respectively. - Asset purchases (QE): MPC announced additional GBP 200 billion of Gilts and corporate bond purchases raising target to GBP 645 billion; weekly pace peaked ~ GBP 15 billion; subsequent rounds expanded target to GBP 895 billion. - FX swap coordination: BOE and other central banks scaled up USD funding swap lines; FX premia fell and operations scaled back from July 2020. - Margin-related liquidity demands estimated by U.K. authorities at around GBP 15 billion over the “dash for cash”; daily variation margin calls on NBFI sector reached as high as 5.6 times the January 2020 average. ### Supporting liquidity among core intermediaries and non-banks - Binding constraint during stress was balance sheet capacity rather than immediate cash shortages. - Use of cleared repos increases netting benefits and reduces probability constraints bind; currently "20-30 percent of U.K. counterparties repo transactions in all currencies are cleared". - Recommendation: BOE consider cleared repo in its repo facilities to ease constraints and encourage wider repo clearing for longer term gilt repos. - Regular short-term repo operations (less than a month) could supplement 6-month ILTR to provide liquidity certainty, especially as BOE exits asset purchases. - BOE market intelligence should be supplemented with more frequent data on Gilts and sterling corporate bond trading; BOE and FCA should work to make bond trading data available in a useful daily form. - For NBFIs: - BOE interventions eventually flowed to NBFIs but inefficient transmission may have required larger interventions. - Not all NBFIs should be eligible for BOE backstops; focus on largest, most interconnected entities with significant presence in core sterling markets. - First-best policy: strengthen NBFI regulation and supervision to reduce liquidity mismatches. - BOE should develop both lending (Market Liquidity Facility (MLF)) and asset purchase operational tools to backstop appropriately regulated large interconnected NBFIs, retaining discretion over eligibility and circumstances. - Role of foreign NBFIs in sterling markets must be factored; BOE should investigate options to provide support to foreign entities if adequately regulated. *Source: 1gbrea2022004 - 48; 76.* --- ### MORAL HAZARD, DESIGN PRINCIPLES, AND RESOLUTION LIQUIDITY FRAMEWORK ### Moral hazard concerns and need for ex-ante clarity - There is "considerable moral hazard in the status quo." (¶92) - Traditional central bank access limits (banks, deposit-takers, FMIs, large broker-dealers) are questioned given growth of market-based finance and NBFIs. - Frequent discretionary asset purchases have increased market expectations of BOE deployment, encouraging reliance and moral hazard. ### Specific liquidity support framework objectives (¶93–¶96) - A more specific liquidity support framework could circumscribe expectations of BOE support and improve ex ante risk management. - Framework benefits: - Reduce discretion compared to current flexible approach by specifying instruments, markets, maturities, counterparty access, pricing, collateral, and exit approach. - Focus support on most central benchmark liquidity and funding markets that are liquid in normal times, of high credit quality, and large benchmark markets (in the U.K., Gilt repo and Gilts markets). - Concentrate support on shorter-term instruments to align with BOE’s short-term market backstop role and facilitate faster, smoother exit. - Moral hazard mitigation design elements: - Provide backstops only to adequately supervised entities. - Require more prescriptive liquidity requirements as quid pro quo for BOE support. - Consider ex ante access fees (analogy to Committed Liquidity Facilities pricing) to link ex post support with ex ante risk taking. - Price lending facilities above normal market rates but not so high as to discourage use in stress. ### RLF and ELA developments (¶97–¶98) - RLF characteristics: - Sits alongside ELA and outside SMF; broad, scalable, flexible tool to support liquidity of firm in resolution. - BOE can provide sterling and FX liquidity secured on wide range of collateral; can request HMT indemnity. - RLF aims to encourage return to market funding ASAP; embodies best-practice principles for ELA with extensive governance and resolution planning. ### Implementation and outstanding steps from 2016 FSAP (selected) - Experimental flow-of-funds statistics produced but many investment fund flows remain unidentified. - AIFMD scope extended to non-EEA managers/funds marketed in U.K.; FCA shares data with BOE for financial stability. - BOE conducted liquidity risk assessment for CCPs in 2019 and followed up. - BOE completed a financial sector stress scenario and initiated a liquidity biennial exploratory scenario work in 2019. *Source: 1gbrea2022004 - 92; Appendix I excerpt.* --- *Source: IMF staff material in content unit 1gbrea2022004 (United Kingdom FSAP).* ### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS ___________________________________________ 7 ### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS ### Overview and scope - The FSAP carried out a focused review of the non-banks in the United Kingdom and systemic liquidity, covering five areas: (i) The overall NBFI system, its links to banks and the rest of the world; (ii) NBFI direct lending to the U.K. economy; (iii) Sterling investment funds (OEFs, AIFs, and MMFs); (iv) CCPs; and (v) Systemic liquidity. - NBFIs are defined as all non-deposit-taking corporations (Figure 1) with limited coverage: Pension Funds and Insurance Companies to the extent they lend to the economy and interact with CCPs; Investment funds only to the extent of Sterling Funds; and broker-dealers only to the extent they interact with CCPs. - Regulatory aspects of NBFIs are covered in a parallel Technical Note (TN). ### Size, structure, and global importance of NBFIs - NBFIs are a very large and heterogeneous group including insurers, pension funds, various types of investment funds, finance companies and money lenders, broker-dealers, and CCPs. - Slightly more than a half of total financial assets is held by NBFIs. - Non-banks hold: - a third of corporate bonds, - a third of corporate loans, - nearly a half of unsecured consumer loans. - A third of non-banks’ assets are located offshore. - The United Kingdom is the largest net exporter of financial and insurance services (as percent of GDP) in the world (mostly commission and fee-based income). - The U.K. is an important marketplace: a third, and in some products even a half, of the worlds’ currencies and derivatives are traded and cleared in London. - U.K. CCPs offer significant netting benefits, clear a variety of products, and serve clients across the globe (clearing members in 23 countries). ### NBFI interlinkages, functions, and funding channels - NBFIs interact with and rely on banks through trading and market-making, brokerage, and wholesale funding. - Several non-bank lenders use bank credit lines and securitization for funding, creating non-trivial interlinkages across the financial sector. - Some NBFIs are directly owned by banks. - Analyses suggest lending cycles of banks and non-banks are largely synchronized; however, in stress tests non-bank lending appears less procyclical compared to banks. - Investment managers and CCPs can materially impact market liquidity during downturns, but data gaps limit precise evaluation. ### Key findings from the Covid-19 shock - U.K. core liquidity markets were severely tested during the March 2020 “dash-for-cash.” - Short-term interbank markets weathered the shock relatively well (supported by the SMF), but sterling Gilts, commercial paper, corporate bond, and FX markets experienced greater pressures: bid-offer spreads widened, market pricing indicators were stretched, and dealers rationed liquidity to NBFI customers because of balance sheet constraints. - The combination of an unprecedented global shock and limited preparedness of some NBFIs were key drivers of liquidity stress: - Some NBFIs were unprepared for sharp price moves and volatility and struggled to raise liquidity for margin calls and fund outflows. - Dealers’ balance sheet constraints insulated dealers from distress but increased stress in markets by limiting intermediation. - The BOE, in concert with other central banks, took aggressive action which effectively backstopped markets: - The BOE stepped up lending and front-loaded Gilts purchases to absorb securities supply from NBFI investors in need of liquidity. - Coordinated FX liquidity provision operations by central banks reduced FX funding pressures. - U.K. end-user firms’ funding needs were met with joint BOE/HMT financing facilities. - Interventions quelled pressures relatively quickly but involved a significant expansion of the BOE’s balance sheet. ### Assessment of the Bank of England’s operational framework - The BOE’s Sterling Monetary Framework (SMF) provides liquidity insurance to banks, building societies, financial market infrastructures and designated investment firms. - The SMF has been relatively broad based, widely available, and stable since the 2016 FSAP; SMF participation has steadily grown and a Resolution Liquidity Framework (RLF) was introduced to support firms in resolution. - The SMF catered well to banks and core intermediaries during the Covid-19 shock, but flow-through of BOE funding to wider markets was constrained by intermediaries’ balance sheet willingness and capacity to supply liquidity. ### Data gaps and analytical limits - Data limitations prevent accurate quantification of: - liquidity of asset managers’ holdings and the ability to project investors’ future liquidity demands; - certain non-bank lending (e.g., buy-now-pay-later schemes and some corporate loans) that remain outside the regulatory perimeter, limiting comprehensive asset quality and systemic risk analysis. - During March 2020, variation and initial margins at U.K. and global CCPs increased sharply; some clients were unprepared though clearing members met margin calls. ### Main policy conclusions and recommendations - Strengthen NBFI liquidity resilience: - Regulators (U.K. and globally) need to enhance NBFI liquidity regulation to better buttress this sector. - Broaden BOE toolkit and access to liquidity: - Implement arrangements to allow some NBFIs more direct access to BOE liquidity to broaden the BOE’s options to manage future liquidity stress; options include asset purchase and lending facilities that could be part of the existing SMF or a separate framework. - Consider options to backstop non-U.K.-based important NBFIs active in sterling markets either directly or via their home country central bank. - Improve BOE market operations and market intelligence: - The BOE could consider the use of clearing in its repo operations to ease bottlenecks. - Liquidity certainty could be enhanced with regular short term repo operations, particularly when asset purchases are being phased out. - The BOE should leverage high frequency detailed trading data on sterling bonds to supplement market intelligence. - Enhance intermediaries’ capacity to transmit liquidity: - Supervisors could examine the flexibility of capital allocation frameworks of core intermediaries to ensure usable buffers are available in business units that provide market funding and market-making. - Manage moral hazard risks carefully: - If more direct BOE access is offered to NBFIs, design features should mitigate moral hazard (for example, emphasis that support is to backstop markets rather than specific entities; clearer statements on the nature of and to whom support may be provided; and structuring facilities for appropriately regulated and systemically interconnected NBFIs with access fees and tighter ex-ante regulatory requirements to mitigate liquidity mismatches). - Address data gaps: - Improve data on NBFI holdings, liquidity profiles, and direct lending to the economy to enable better stress analysis and policy design. ### Priority example from recommendations table - Interlinkages: - Recommendation 1: "The analysis of interlinkages between NBFIs and deposit taking institutions (DTIs) should also include their links with NBFIs and DTIs in the Rest of the World. (¶4)" - Priority: Medium - Timeline: MT *Source: EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS, United Kingdom FSAP (IMF).* ### 2. Continue reducing the size of unidentified exposures in experimental ### 1gbrea2022004 - 2. Continue reducing the size of unidentified exposures in experimental ### Main recommendations (selected, with priority and timeline) - 2. Continue reducing the size of unidentified exposures in experimental statistics on NBFI balance sheets (Who-to-whom data by ONS). (¶3, ¶6) - Priority: Medium - Timeline: MT - 3. Collect or systematize the collection and reporting of data for all Sterling holdings by all investors, including each NBFI. Use these data to enhance the analysis of concentration of NBFI investors in key sterling markets – e.g., equity, corporate bonds, CPs, Gilts, including implications for liquidity under stress in these markets. (¶5) - Priority: High - Timeline: MT - 4. Analyze lending behavior of different types of NBFI under stress, including implications for lender’s solvency and liquidity. (¶16-18) - Priority: Medium - Timeline: MT - 5. In collaboration with the international regulatory community, consider the most effective and proportionate way to collect data and analyze the: - a. liquidation needs of the portfolios of asset managers under stress, based on potential redemptions, variation and initial margin, leverage, and financing of their positions, - b. liquidity profile of holdings of the portfolios of asset managers during times of stress. (¶24-26) - Priority: High - Timeline: MT - 6. Incorporate observed fund actions during times of stress, such as deleveraging and cash hoarding, in system-wide financial stability simulations. (¶28, ¶30, ¶34) - Priority: High - Timeline: MT - 7. For money market funds, decouple obligations for a manager to impose fees and gates from regulatory thresholds for minimum liquid assets, while continuing to require fund managers to take any necessary action in line with the best interests of all fund investors. (¶39) - Priority: Medium - Timeline: MT - 8. Coordinate supervisory stress testing of CCPs with stress tests on CCP-clearing members and clients so that the results of each test can inform the other tests. (¶46) - Priority: High - Timeline: MT - 9. Report aggregate measures of CCP stress liquidity demands on clearing members and clients as part of the output of supervisory stress tests. (¶47) - Priority: High - Timeline: MT - 10. Augment transparency of CCP stress liquidity demands towards clearing members and clients. (¶47) - Priority: Medium - Timeline: MT - 11. Investigate use of cleared Gilt repo operations (¶81) and offer regular short term repo operations. (¶82) - Priority: Medium - Timeline: MT - 12. Develop capacity to monitor Gilt and Sterling corporate bond trading flows to complement the BOE’s market intelligence. (¶83) - Priority: High - Timeline: NT - 13. Consider allowing appropriately regulated and systemically interconnected NBFIs with a significant presence in the sterling gilt and repo markets access to some repo and/or Gilt purchase operations in times of stress. (¶88-91) - Priority: High - Timeline: NT - 14. Develop and clearly communicate the terms on which the BOE will provide liquidity to eligible NBFIs including objectives, markets, instruments, eligible participants and the exit criteria and approach that will be employed (¶94-96). - Priority: High - Timeline: NT - 15. Ensure that supervisory expectations of U.K. regulated intermediaries do not excessively constrain regulated firms’ ability to manage their internal allocation of capital and liquidity in times of stress. (¶80) - Priority: Medium - Timeline: NT (Note: NT = Near Term (now to one year); MT = Medium Term (within 1 to 3 years)) ### Data gaps and measurement issues - Experimental statistics and identification - The experimental statistics on sectoral exposures, first published by ONS in October 2020, are an important first step, but granular data on domestic and foreign non-banks are missing, reported as not identified. (¶6) - Recommendation: Continue improving the experimental statistics on balance sheet exposures compiled by the ONS, especially filling the information gaps on the NBFI sector. (¶9) - Holdings of Sterling assets - Lack of comprehensive data on holdings of Sterling assets (equities, Gilts, CPs, Corporate Bonds) limits assessment of investor concentration and potential liquidation pressure. (¶7) - Recommendation: Collect or systematize the collection and reporting of data for all Sterling holdings by all investors, including each NBFI, to enhance analysis of concentration and liquidity implications under stress. (¶9) - International coordination - Data gaps for non-banks are largely an international issue; engagement with international regulators is needed to address gaps effectively. (¶8) ### Structure, size, and global links of the NBFI system - Relative size and market roles - Non-banks in the United Kingdom are very large and diverse; their overall size, by assets, is only marginally below that of banks. (¶3) - Non-banks hold a third of corporate bonds, a third of corporate loans, and nearly a half of unsecured consumer loans. (¶4) - International integration and market importance - The United Kingdom is home to four G SIBs. (¶5) - Half of the United Kingdom’s banking sector’s assets and liabilities and a third of non-banks’ assets are located offshore. (¶5) - The three U.K. CCPs serve clients across the globe (clearing members in 23 countries). (¶5) ### Macrofinancial linkages and non-bank credit - Roles and interconnections - Non-banks provide credit through direct loans and investing in corporate bonds; many originate, service, and securitize loans and invest in securitized products. (¶10) - Non-bank lending series is derived indirectly as the difference between total private credit and bank credit. (¶10) - Reliance on banks and funding channels - Some non-bank lenders rely on banks for wholesale funding at origination (e.g., credit lines for mortgage origination); non-bank subsidiaries of commercial banks receive funding via parent banks. (¶11) - Non-banks may issue asset-backed securities; investors in securitizations include both commercial banks and NBFIs. (¶11) - Credit cycles and market share - Bank and non-bank credit cycles are largely synchronized; correlation: 0.71. (¶13; Figure notes) - Since the GFC, non-bank intermediation gained market share as banks withdrew from certain riskier segments. (¶14) - Post-GFC, stricter bank regulation (Basel III) made lending in certain segments unattractive to banks, contributing to risk migration to non-banks. (¶15) ### Lending behavior under stress and simulation approach - Purpose of simulations - Simulations of non-bank lending under stress assess cyclicality of non-bank credit and the risk that continued non-bank credit intermediation to the U.K. economy may be at risk if market valuations decline, loan quality deteriorates, and funding is pressured. (¶16) - Modeling framework and determinants - Estimated determinants of non-bank lending include: bank lending (with a lag), income growth, slope of the yield curve, performance of stocks, and unemployment. (¶17) - Stress scenarios applied (used in prudential bank stress tests) - Adverse scarring scenario with a protracted recession with lasting economic scars from the pandemic, resulting from losses of consumer and investor confidence (temporary) dislocations in productive capacity; (¶17) - Adverse scenario with tightening financial conditions, as a response to a surge in global inflation. The U.K. economy would be impacted through high imported inflation, supply bottlenecks, and increased risk premia. (¶17) ### Specific recommendations for funds, CCPs, and market functioning - Asset managers and funds - Collect data and analyze liquidation needs and liquidity profiles of asset managers’ portfolios under stress (redemptions, margin, leverage, financing). (¶24-26; Recommendation 5) - Incorporate observed fund actions (deleveraging, cash hoarding) in system-wide financial stability simulations. (¶28, ¶30, ¶34; Recommendation 6) - For Money Market Funds, decouple manager obligations to impose fees and gates from regulatory thresholds for minimum liquid assets, while requiring managers to act in the best interests of investors. (¶39; Recommendation 7) - CCPs and clearing - Coordinate supervisory stress testing of CCPs with stress tests on CCP-clearing members and clients; report aggregate measures of CCP stress liquidity demands on clearing members and clients. (¶46-47; Recommendations 8–10) - Augment transparency of CCP stress liquidity demands towards clearing members and clients. (¶47; Recommendation 10) - Sterling monetary framework and market infrastructure - Investigate use of cleared Gilt repo operations and offer regular short term repo operations. (¶81-82; Recommendation 11) - Develop capacity to monitor Gilt and Sterling corporate bond trading flows to complement BOE market intelligence. (¶83; Recommendation 12) - Consider access for appropriately regulated and systemically interconnected NBFIs to some repo and/or Gilt purchase operations in times of stress; develop and clearly communicate BOE terms for liquidity provision to eligible NBFIs. (¶88-96; Recommendations 13–14) *Source: 1gbrea2022004 - 2. Continue reducing the size of unidentified exposures in experimental (IMF staff technical note excerpts).* ### 18. Lending under stressed conditions shows lower procyclicality of non-bank credit ### 18. Lending under stressed conditions shows lower procyclicality of non-bank credit ### Key findings on lending dynamics under stress - Under the recessionary scenario with ‘scarring’ effects on the economy, non-bank credit contracts less and resumes growth faster than bank credit. - Under tightening of global financial conditions, non-bank lending contracts less and is more countercyclical than bank lending. - The unemployment rate projections contribute only minimally to the dynamics of non-bank lending: in the scarring scenario, the unemployment rate in 2022/2021 contributes countercyclically only 0.06 percent, compared to the decline in lending by 1.5 percent. - The analysis would be more informative if replicated individually for each type of NBFI, but this is currently not possible due to limited data availability. ### Determinants of direct lending by NBFIs (Box 1) - Conceptual drivers considered in the regression: - Slope of the yield curve — Slope: difference between long- and short-term yields on government bonds. When the term premium increases, NBFIs expected to increase bond investments and reduce origination of direct loans. - Returns on stocks — EqYield: higher returns on stocks expected to attract NBFI investors and reduce growth of NBFI direct lending. - Bank loans — BL: reduced bank lending signals less appetite for banks to fund NBFI lenders; NBFI lending expected to slow down, potentially with a lag. - Income — real GDP: higher income growth positively correlates with NBFI lending growth. - Unemployment rate — UR: higher unemployment expected to increase NBFI lending as clients move from banks to nonbanks. - Estimated least squares relationship (quarterly data 2007: Q1 to 2021: Q1; 80 observations; explains 61 percent of variation in NBFI lending): - gNBL_t = 0.78*** gGDP_{t-1} + 0.36*** gBL_{t-4} – 2.67*** Slope_t – 0.15*** EqYield_t + 0.79*** UR_t - Standard errors (in parentheses) shown as: (0.29) (0.14) (0.66) (0.04) (0.21) - Interpretation of estimated signs: - NBFI lending encouraged by declining stock returns and long-term yields, income growth, and bank lending (with a lag). - NBFIs appear to act as substitute lenders for household loans during rising unemployment. ### Data gaps - Aggregate lending statistics for insurers, pension funds, OFIs, and finance companies are calculated on an annual basis; some lenders not captured (fintech-enabled consumer credit such as buy-now-pay-later, employer salary advance schemes, and corporate loans). - Data on asset quality of non-bank SME loans and commercial real estate loans are not consistently available. - Line-by-line fund holdings and liquidity data for open-ended funds (OEFs) are available only annually or semi-annually with reporting delays up to four months; for U.K. MMFs, additional line-by-line holdings are reported quarterly under U.K. MMFR rules. - Available data lack granularity in frequency and detail needed to match funds’ liquidation needs to asset liquidity profiles during stress events. ### Recommendation - Authorities are encouraged to further enhance the analytical framework by analyzing lending behavior of each type of non-bank under stress. - An analysis of lending under stress and implications from losses across non-bank types would be helpful to assess potential vulnerabilities in non-banks. This recommendation may need to be taken forward globally. ### Asset management: sector size and systemic links - Asset management industry size as of end-2020: £11 trillion (assets under management). - Industry contributes around 1 percent of the United Kingdom’s GDP and employs 114,000 people (42,200 directly). - Liquidity demands from asset managers during stress—often driven by investor redemptions—can have knock-on effects to markets and other market participants. - Many funds used by U.K. investors and/or investing in U.K. assets are domiciled outside the United Kingdom, complicating systemic-risk evaluation and necessitating international data sharing and regulatory consistency. ### Money Market Funds (MMFs) stress episode and stress-test results - March 2020 “dash-for-cash”: BOE estimates total outflow from Sterling MMFs to be approximately 25 billion GBP. - MMFs largely did not use liquidity buffers in March 2020; instead they lowered the maturity of their holdings to avoid breaching buffers. - Stress testing of Sterling MMFs (daily security-level commercial data; funds domiciled in Ireland, Luxemburg, and the United Kingdom) finds: - Total liquidation needs for Sterling MMFs under a weekly redemption shock: £22 billion (similar to liquidations in March 2020). - Table 2 (Proportional Liquidation Asset Profile for Sterling MMFs under a Weekly Redemption Shock; values in £ billions; MMF portfolio reference date April 9, 2021): - Total Liquidation Needs: Treas 0.29, Govt 0.02, Repo 5.05, CD 8.24, CP 3.64, ABCP 0.49, TD 3.54, Other 0.75, Total 22.0 - Liquidation Needs Government: Treas 0.14, Govt 0.00, Repo 0.62, CD 0.00, CP 0.00, ABCP 0.00, TD 0.00, Other 0.00, Total 0.8 - Liquidation Needs Prime: Treas 0.16, Govt 0.02, Repo 4.43, CD 8.24, CP 3.64, ABCP 0.49, TD 3.54, Other 0.75, Total 21.3 - Total asset Government: Treas 1.52, Govt 0.00, Repo 8.32, CD 0.00, CP 0.02, ABCP 0.00, TD 0.00, Other 0.00, Total 9.9 - Total assets Prime: Treas 3.30, Govt 0.33, Repo 42.23, CD 88.13, CP 41.22, ABCP 7.10, TD 37.90, Other 10.76, Total 231.0 - % Liquidation Needs Prime (by asset class): Treas 4.8%, Govt 6.2%, Repo 10.5%, CD 9.3%, CP 8.8%, ABCP 6.9%, TD 9.3%, Other 6.9%, Total 9.2% - % Liquidation Needs Government (aggregate) noted at 8.9% and 7.4% in table entries. - Table 3 (Proportional Liquidation Maturity Profile for Sterling MMFs under a Weekly Redemption Shock; values in £ billions; MMF portfolio reference date April 9, 2021): - Total Liquidation Needs by maturity bucket: 1 day 8.10, 2-7 days 1.97, 8-30 days 2.43, 31-60 days 2.70, 61-90 days 2.76, 91-180 days 3.07, 181-365 days 0.98, Total 22.0 - Liquidation Needs Government by maturity: 0.53, 0.05, 0.06, 0.08, 0.00, 0.03, 0.01, Total 0.8 - Liquidation Needs Prime by maturity: 7.58, 1.92, 2.37, 2.62, 2.75, 3.04, 0.97, Total 21.3 - Total asset Government by maturity: 5.84, 1.13, 0.74, 0.86, 0.31, 0.86, 0.11, Total 9.9 - Total assets Prime by maturity: 78.96, 21.39, 28.62, 27.77, 28.66, 31.75, 13.77, Total 231.0 - % Liquidation Needs Government by maturity: 9.0%, 4.3%, 8.4%, 8.8%, 1.0%, 3.5%, 5.0%, Total 7.6% - % Liquidation Needs Prime by maturity: 9.6%, 9.0%, 8.3%, 9.4%, 9.6%, 9.6%, 7.0%, Total 9.2% ### Open-ended funds and alternative investment funds - Data limitations: - OEFs: supervisory holdings data exist but only annually or semi-annually with delays up to four months; liquidity characteristics not available. - Fixed income and equity open-ended funds appear largely unleveraged; stress tests based on redemptions are possible but limited by monthly-frequency data. - Fixed income funds hold approximately 38 percent of their total holdings in BBB bonds, making them vulnerable to systemic downgrades. - Alternative Investment Funds (AIFs): - AIFMD provides quarterly information on leverage, counterparties, portfolio sensitivities, and asset liquidity for AIFs, but some funds have complicated leverage, borrowing, and liquidity profiles. - Hedge funds borrow largely via repos and collateralized borrowing via prime brokers, suggesting vulnerability to increases in the cost of funding. - AIF liquidity mismatch and financial leverage illustrated in AIFMD Q4, 2020 data (Figures referenced). *Source: IMF staff calculations and material in content unit 1gbrea2022004 - 18. Lending under stressed conditions shows lower procyclicality of non-bank credit* ### 33. Liquidity mismatch appears to be limited. Funds’ reports in AIFMD provide information ### 33. Liquidity mismatch appears to be limited. Funds’ reports in AIFMD provide information ### Liquidity mismatch: aggregate findings - Aggregate data (Figure 11) indicate that—besides Real Estate Funds across all horizons and Funds of Funds at the 0–1 day horizon—the liquidity mismatch, i.e., the mismatch between the liquidity profile of the holdings of the fund and the liquidity profile of the potential redemptions, is limited. - The vertical axis in the analysis expresses liquidity mismatch as a percentage of total assets under management over different horizons. - Definition caveat: the definition of liquidity mismatch assumes that investors redeem their entire investment at the appropriate time horizon. Example: Real Estate Funds would face a liquidation need if redemptions exceeded 80% of their assets. - Footnote: The FCA has proposed a framework to lengthen redemption periods for funds that invest in property and has introduced a new framework for funds that invest in other highly illiquid assets (LTAFs). ### Stressed profits and losses: methodology and aggregate results - Data source: AIFMD Q4 2020. - Stress inputs: - Interest rate shocks for maturity buckets matched observed changes to the 1-year, 10-year, and 30-year US Treasury constant maturity rate between February 18 and March 9, 2020. - Credit spread shocks matched observed changes for the ICE Bank of America (BofA) 1-3-year, 7-10-year, and 15+year US corporate index effective yield between March 9 and March 20, 2020. - Aggregate results (top panels of Figure 12): - On aggregate, losses are moderate. - Biggest loss corresponds to the less than 5-year credit spread bucket for hedge funds—approximately 2% of asset value. - Aggregation caveats: - Aggregation over all reporting funds may mask large individual variations. - Objective difficulty aggregating DV01 and CS01 across different positions (e.g., long three-year corporate bond issued by one firm and short another three-year corporate bond issued by another firm may yield small net DV01/CS01 but still contain firm-specific risk). - Similar challenges when aggregating sensitivities of bonds of different maturities. - Regulators have access to information at the individual AIF level. ### Assessing leverage and potential liquidation needs - Leverage measurement challenge: calculating leverage is complicated when portfolios include derivatives; several definitions exist. - Risk-based leverage measure used (bottom panels of Figure 12): - Ratio = (sum of absolute value of DV01 (CS01) for short and long positions) / (absolute value of the net DV01 (CS01)). - Example provided: gross DV01 for ≤5-year assets = 68 million; net DV01 = 17 million; leverage = 4. - Interpretation: to change leverage from 4 to 2, gross DV01 would need to be reduced from 68 million to 34 million; if liquidations are proportional, half of gross positions would need to be absorbed by other market participants. - Aggregate results: - Hedge funds exhibit the highest leverage in credit-sensitive assets with maturities more than 15 years – a leverage ratio over 10. - Whether this leverage leads to small or large liquidation needs depends on the actual magnitude of the CS01 values, which turn out to be small relative to the size of assets under management. - Aggregation caveat: leverage for individual funds may be much larger, or smaller. ### Complications for stress testing AIFs - Data limitations constraining stress testing: - Low frequency and delay in reporting. - Missing data on initial margin requirements (potentially available in EMIR data). - Biggest difficulty: data do not account for dependence between different risks (e.g., whether leverage declines when initial margin increases and funding becomes more expensive). - Given complicated dependence between risks, preferable approaches: - Directly estimate potential liquidation needs using historical information, or - Consider specific stress scenarios to determine liquidity pressures that AIFs may place on markets and other participants. ### Swing pricing and liquidity management tools - Empirical observation: joint BOE/FCA study (2021) showed fund managers used swing pricing frequently but inconsistently during the Covid crisis. - Purpose: Funds typically set swing pricing factors to protect investors from dilution. - FPC judgment (March 2021): calculation and application of swing pricing could in principle be enhanced to better address potential financial stability risks associated with first-mover advantage. - Proposed enhancements: - Bank and FCA staff proposed a possible framework for enhancing swing pricing. - Consistent and more realistic liquidity classification is an essential first step; Bank and FCA staff set out a possible framework for consistent and realistic liquidity classification of a fund’s assets but acknowledge it would need global application to be more effective. - FCA proposal: funds that invest in property should have notice periods before an investment can be redeemed; introduced the long-term asset fund (LTAF) structure using infrequent redemption periods and notice periods to align redemption terms with liquidity of underlying assets. - Difficulties in applying swing pricing in stress: - Estimating market impact of liquidation is particularly difficult during times of stress when prices change quickly and market volume is elevated. - Possible approaches: - Use ETF price data to calculate swing factors. - Consider lengthening redemption period based on volume of redemptions and calculate the price redeeming investors receive after liquidation, rather than in advance. - Important design consideration: ensure swing pricing rules do not encourage first-mover withdrawals (e.g., avoid thresholds linked to redemptions relative to assets under management that induce withdrawals). ### Recommendations (authorities strongly encouraged to) - In collaboration with the international regulatory community, consider the most effective and proportionate way to collect data and analyze: - liquidation needs of the portfolios of asset managers under stress, based on potential redemptions, variation and initial margin, leverage, and financing of their positions, - liquidity profile of holdings in asset managers’ portfolios during times of stress. - Incorporate observed fund actions during times of stress, such as deleveraging and cash hoarding, in system-wide financial stability simulations. - For money market funds, decouple obligations for a manager to impose fees and gates from regulatory thresholds for minimum liquid assets, while continuing to require fund managers to take any necessary action in line with the best interests of all fund investors. *Source: AIFMD report for Q4, 2020 and associated text in the provided content unit.* ### 48. The authorities are encouraged to increase transparency of CCP stressed liquidity ### 48. The authorities are encouraged to increase transparency of CCP stressed liquidity demands towards clearing members and clients ### Recommendations on CCP stress-testing and transparency - Coordinate supervisory stress testing of CCPs with stress tests on CCP clearing members and clients so that the results of each test can inform the other tests. - Report aggregate measures of CCP stressed liquidity demands on clearing members and clients as part of the output of the stress tests. - Augment transparency of CCP stressed liquidity demands towards clearing members and clients. ### Evaluation of the BOE’s Proposed Framework for CCP Stress-Testing (summary points) - Risk coverage and participation - covers both credit and liquidity risk to assess CCP resilience (including impact of concentrated positions); potentially also include operational risk associated with default - evaluation of the clearing services of the three U.K. CCPs; potentially include non-U.K. CCPs in the future - Assessment: The proposed risk coverage and participation are standard in supervisory CCP stress testing. Potential improvement: combine it with regulatory and other constraints on clearing members and clients to evaluate resilience of the financial system, not just CCP resilience. - Frequency - annual frequency - launched during Q4 and ending by end-Q2 of following year - Assessment: The annual frequency enhances international practice; regular schedule is an improvement over irregular schedules. - Methodology - credit stress testing: combination of market shocks and member default scenarios, with additional concentration costs - liquidity stress testing: similar basis to credit stress testing, with additional disruption to service providers and challenges to mobilize liquid resources - BOE prescribes key market stress shocks which CCPs extrapolate to ensure full coverage of products cleared; CCPs calculate profit and loss at the account level - BOE will apply various default scenarios on clearing members and providers of liquidity services, and porting assumptions - BOE runs validations and plausibility checks on CCPs’ submissions, including profit and loss values provided by the CCPs - Assessment: Methodology is in line with international practice; BOE can sense-check CCP profit and loss numbers with reference to risk exposures and internal CCP stress testing. - Market shock scenarios - considers historical; CCPs’ own scenarios; hypothetical; empirical approaches - balances number of scenarios with cost of performing the test; one-to-three scenarios mentioned; actual test uses four scenarios that are linear functions of one another and are increasing in severity - considers standardized vs. distinct scenarios; a range of risk factors relevant to CCPs’ business - Assessment: Methodology encompasses international practice. Potential improvement: increase number of scenarios if possible without increasing burden. - Reference dates - considers several possible criteria for reference dates and the potential benefits of using multiple reference dates - Bank’s 2021–22 exercise uses a reference date of September 17, 2021. - Defaulter assumptions - considers extensions of cover 2; system-wide approaches where common clearing members default across CCPs; characteristic based approaches; and statistical-based approaches - Assessment: Methodology extends international practice; characteristic-based or statistical-based approaches can supplement the Cover-2 standard. - Sensitivity and reverse stress testing - sensitivity analysis considers a range of default assumptions across the credit and liquidity components - reverse stress testing considers increasingly severe assumptions regarding market stress, concentration, and number of defaulters on CCP resilience - Assessment: Consistent with international practice and thorough; analysis provides views under increasingly severe assumptions but does not estimate plausibility. - Disclosure - explanation of the approach used in the stress test - presentation of the results. Potential metrics include: - drawdown of CCP resources - source of losses and outflows - diversification of stress losses and liquidity inflows - scenario comparison - qualitative measures - granularity of disclosures: transparency vs. sensitivity of granular disclosures - Assessment: Suggested disclosures focus on CCP resilience. Potential improvement: provide information regarding stress CCPs may impose on clearing members and clients through increased demand on clearing member/client resources—for example in terms of levels of variation and initial margin, and impact on the pre-funded and assessment portions of CCPs’ guarantee funds. ### BOE operational framework: key developments since the 2016 FSAP - Access and participation - As of February 2021, the BOE’s Sterling Monetary Framework (SMF) was available to around 218 participants. - Eligible participants include banks and building societies, broker-dealers, central counterparties, and international central securities depositories. - Banks, building societies and broker dealers have access to the full range of SMF facilities whereas financial market infrastructures can access a narrower set of facilities (reserves accounts, operational standing facilities, the Discount Window Facility in some cases). - Key access criteria reflect firms’ level of importance to the U.K. financial system; their level of liquidity risk; and whether firms are subject to appropriate regulatory scrutiny. - Reserves and liquidity provision - Successive rounds of Quantitative Easing since the GFC period expanded the BOE balance sheet, leaving the banking system with significant excess reserves: 905 billion GBP or around 45 percent of GDP. - These reserve balances are absorbed in the deposit accounts of SMF participants and attract the BOE policy rate – Bank Rate. - BOE liquidity facilities include standing facilities, regular term repo operations (Indexed Long-Term Repo (ILTR) operations), the Discount Window Facility (DWF), Emergency Liquidity Assistance (ELA), a Resolution Liquidity Funding framework (RLF), FX lending operations, and Asset Purchase Facility (APF) operations. - The DWF provides scalable backstop funding secured on a broad range of collateral priced on a sliding scale over Bank Rate depending on the volume of funding required. - ELA is available to solvent but illiquid firms whose needs cannot easily be satisfied by the SMF. - Structural developments and governance - The SMF has been stable since the last FSAP; number of SMF participants grew from 175 participants in 2016 to around 219 in 2021, mainly from new banks and building societies. - In June 2021 the BOE announced the eligibility of international central securities depositories. - The Resolution Liquidity Framework (RLF) was established in October 2017 to provide temporary liquidity support to firms in resolution; BOE balance sheet protected by collateral, potential HMT indemnity, and loss recovery from industry in line with FSB guidance. - A 2018 review clarified the BOE’s dividend and capital framework, setting mutual understanding between HMT and the BOE on operations backed by BOE capital, indemnities, and capital/dividend policy. - U.K. authorities have acted on recommendations of the 2016 FSAP. ### Impact of the COVID-19 crisis on U.K. core liquidity markets - Timeline and general effects - Increased global financial market volatility translated to liquidity stress in U.K. core markets in early March 2020. - Central banks responded with reduced policy rates but liquidity pressures continued through the first half of March 2020. - Money and repo markets - Sterling interbank market liquidity reduced; U.K. short-term interest rates moved above Bank rate and intraday volatility increased. - Pressures were most obvious in the sterling repo market where prices were more elevated and for longer than in the unsecured SONIA market. - Sterling money markets performed relatively well compared to U.S. markets where short term interest rate volatility was noticeably more volatile. - Gilt, commercial paper, and corporate bond markets - Credit spreads widened significantly; traded volumes in credit markets dried up. - The U.K. Gilts market became the epicenter of the “Dash for Cash”; Bid-offer spreads widened significantly. - Volatility spiked but traded volumes generally remained robust; measures of Gilt market resiliency showed signs of liquidity strain. - Dealers accumulated significant inventories but could not satisfy imbalance of supply and demand in Gilts. - Pressures in Gilts had flow-on effects to other markets; mid-March 2020 saw Gilts yields start to rise significantly. - FX markets - U.K. sterling – U.S. dollar exchange rate came under pressure reflecting the market’s desire to accumulate US dollars. - USD liquidity shortages reflected in the U.K. sterling – USD cross currency swap margin. - Margin-related liquidity demands and NBFIs - Increased market volatility led to increased variation margins (for existing portfolios) and higher initial margins (for new positions), much of which needed to be covered in cash. - Banks and core intermediaries were relatively well placed due to significant sterling reserve balances with the BOE; NBFIs were less prepared and found it difficult to liquidate assets as market conditions deteriorated. - Selling pressures were broad based as NBFIs sold liquid elements and then illiquid assets to maintain portfolio composition. - Margin-related demand for liquidity was estimated by the U.K. authorities at around GBP 15 billion over the “dash for cash” period. - Daily variation margin calls on the NBFI sector reached as high as 5.6 times the January 2020 average. *Source: 1gbrea2022004 - 48.* ### 62. The “dash for cash” exposed underlying liquidity mismatches in some NBFIs active in ### 1gbrea2022004 - 62. The “dash for cash” exposed underlying liquidity mismatches in some NBFIs active in ### Dash for Cash and NBFI Liquidity Mismatches - Money Market Funds (MMFs) and other Liability Driven Investors (LDI) (insurance companies, pension funds, asset management firms managing LDI portfolios) faced acute stress because they offered daily liquidity while holding assets of uncertain liquidity in stress situations. - MMFs saw a total of GBP 25 billion in redemptions in mid-March 2020. - Redemptions were financed by: - sales of Gilts, - reduced Gilt repo market investments, - reduced commercial paper and certificates of deposit investments. - NBFI interconnections were exposed as NBFI investors held significant liquidity in MMFs themselves. - Redemptions from open-ended funds generated selling pressure in Gilts and corporate bonds by asset managers. ### Official Sector, Leveraged Investors, and Market Pressures - Official sector reserve managers and leveraged entities contributed to liquidity pressures but were less prominent in the U.K. than in the U.S.: - Sterling reserves were around 4.5 percent of allocated reserve holdings in Q1 2020 compared to over 60 percent for US dollar reserves holdings (IMF COFER survey reference). - Less evidence in the U.K. of large-scale liquidation of leveraged positions in Gilts compared to the U.S., although some leveraged investors sought to enter the U.K. market to take advantage of pricing dislocations. - UK authorities estimate dealers accumulated GBP 10 billion of Gilts over the Covid-19 shock period (0.9 percent of conventional Gilts outstanding). ### Dealer Balance Sheet Constraints and Market Pricing - Core intermediaries entered the crisis with substantial liquidity and capital buffers; the binding constraint was balance sheet capacity rather than immediate cash shortages. - Dealer balance sheets had finite short-run capacity; intermediaries rationed liquidity to NBFIs, favoring larger regular customers and offering poorer terms to more marginal customers. - Cleared nettable derivatives (which attract much lower capital requirements) were priced significantly lower than non-nettable counterparts of equivalent risk, reflecting capital and balance sheet constraints. ### Bank of England (BOE) Operational Response - Overall approach: scale up existing tools and deploy new operations to support sterling money market liquidity, backstop corporate funding, purchase Gilts and corporate bonds, support FX funding markets in coordination with other central banks, and provide targeted regulatory relief. - Key facilities and actions: - Indexed Long-Term Repo (ILTR): - ILTR is a six month operation with broad collateral eligibility. - Moved to weekly frequency from 2019; weekly ILTR enabled quick response in late February and March 2020. - ILTR volumes increased significantly during the stress. - Contingent Term Repo Facility (CTRF): - Launched from 24 March 2020 as pressures mounted. - CTRF repos were 3 months at a fixed price of 15 basis points over Bank Rate. - Demand for “Level A” collateral (primarily Gilts) was elevated. - Operational Standing Facility (OSF) available but not significantly used. - Corporate Covid and SME facilities: - HMT/BOE Covid Corporate Financing Facility (CCFF) purchased corporate paper from U.K. firms; open until March 2021. - Term Funding Scheme with SME incentives (TFSME) provided four, and then six-year funding to SMF participants; open until October 2021. - Demand for these facilities was significant for the period they were open. - Asset purchases (QE): - MPC announced an additional GBP 200 billion of Gilts and corporate bond purchases, increasing the target stock of the BOE’s bond holdings to GBP 645 billion. - The weekly pace of QE asset purchases peaked at around GBP 15 billion in nominal terms. - Asset purchases were front loaded to relieve Gilt and corporate bond market liquidity pressures (March–September 2020). - Subsequent rounds of additional QE expanded the target stock of securities holdings to GBP 895 billion. - FX swap line coordination: - BOE, in concert with the US Federal Reserve and other major central banks, scaled up and enhanced FX swap line operations supplying USD funding. - U.K. demand for FX was significant but not protracted; FX funding pressures eased by mid-2020. - The BOE scaled back the frequency and maturity of FX funding operations from July 2020 as cross currency swap premia fell below the cost of access. ### Effectiveness and Transmission Challenges - Short-term interbank market rates remained well anchored; SONIA remained particularly well anchored and repo rates remained within the BOE’s interest rate corridor. - Gilts and corporate bond market dysfunction was counteracted successfully by BOE asset purchases; indicators of Gilt market illiquidity improved through April and May 2020 and had normalized by mid-2020. - The transmission of central bank liquidity to wider market liquidity depends on intermediaries’ willingness and capacity to provide liquidity, which is influenced by: - preserving solvency and liquidity, - risk/return tradeoffs, - reputational and funding access concerns, - relative attractiveness of maintaining regular customer relationships (large regular customers fared better than marginal customers). - Regulatory and balance sheet measures: - U.K. leverage ratio rules (2016) excluded from the calculation deposits with central banks where reserves holdings were matched with liabilities in the same currency and of identical or longer maturity, providing greater flexibility coming into the shock. - U.K. capital framework included material capital buffers (countercyclical capital buffer, additional buffer for systemically important banks) that could be released in stress; authorities encouraged deployment of these buffers. - Temporary relief: firms could exclude loans under the Bounce Back Loan Scheme (BBLS) from the total exposure measure of the U.K. Leverage Ratio requirement to encourage lending. - A “rule modification by consent” permitted earlier reporting changes for pending settlements to mitigate discouragement of market making activity. - No U.K. allowance was made to exclude U.K. government securities holdings from the leverage ratio calculation (unlike the U.S. temporary treatment for U.S. treasuries). *Italic: Source — Excerpt from IMF country team material on the United Kingdom response to the Covid-19 shock (content unit: 1gbrea2022004).* ### 76. The capacity to provide liquidity reflects regulatory constraints and funding and credit ### 1gbrea2022004 - 76. The capacity to provide liquidity reflects regulatory constraints and funding and credit ### Liquidity capacity determinants (paragraph 76) - Firms can only provide funding if their own funding is secure; market liquidity and availability of central bank liquidity backstops are important. - Firms can only lend to or trade with customers if credit risks are adequately managed. - Collateral availability of clients, and the capacity to trade using cleared instruments, greatly reduces risks of client trading and increases firms’ capacity to provide liquidity. - Capital, liquidity, and leverage constraints are important determinants of firms’ capacity to provide liquidity; most of these are regulatory constraints laid down by the United Kingdom and/or foreign regulators. - Firms avoid breaching regulatory requirements both to prevent supervisory action and to protect market position, ability to raise funding, and the value of firms’ equity. - There is strong overlap between firms’ willingness and capacity to provide liquidity. - Regulators impose high level regulatory constraints that do not specifically apply at the business line level; firms’ risk management frameworks translate aggregate regulatory requirements into specific business-line limits, generally in the form of balance sheet limits. - Flexibility and buffers in firms’ risk management frameworks are important drivers of firms’ capacity to provide liquidity when customer demand unexpectedly rises. - If capital can’t quickly flow to a business unit experiencing a spike in customer demand, rationing occurs. - The probability of constraints becoming binding can be reduced if firms can clear and net customer trades, as more volume can be dealt within a given leverage/capital envelope. ### Supporting Liquidity Among Core Intermediaries (paragraphs 77–83) - The BOE’s SMF catered well to banks and core intermediaries during Covid-19; SMF design itself was not a constraint in the “dash for cash” episode. - U.K. money markets were well backstopped by the regular scalable repo operations the BOE routinely provides; key ILTR and CTRF operations were well supported by a full range of core intermediaries. - Key challenge: improve the leverage of BOE facilities on the wider markets by relaxing constraints intermediaries face when channeling funding from the BOE to the wider market in periods of stress. - Constraints reflect factors that drive intermediaries’ willingness to take risk and extend funding and factors around their capacity to provide financing to customers. - The BOE has contributed to FSB and BIS working groups on related thinking and policy responses. - U.K. authorities have only limited leverage on intermediaries’ willingness to provide funding; authorities’ best contribution is to backstop the system effectively and take prompt action to reduce market volatility (as done in the “dash for cash” period). - Supervisors could examine the flexibility of capital allocation frameworks of core intermediaries to ensure usable buffers are available for business units providing market liquidity and making markets in securities. - Use of cleared repo transactions in the BOE’s repo facilities (OSF, ILTR and CTRF) could ease constraints by allowing firms to net repo transactions with the BOE against repo lending in the market. - The sterling cleared gilt repo market proved more robust in the “dash for cash” episode; resilience partly reflects balance sheet benefits of cleared repos given increased netting ability. - Operational challenges and cost-benefit considerations for BOE offering cleared repo; lessons may be available from the U.K. DMO’s use of repo clearing; other central banks use or are exploring cleared repo (example given: Brazilian Central Bank’s SELIC system). - Currently, cleared sterling repo is not dominant: "20-30 percent of U.K. counterparties repo transactions in all currencies are cleared" and is mainly used for short term interbank transactions. - BOE cleared repos could backstop short-term interbank markets and could encourage/facilitate wider use of repo clearing for longer term gilt repos. - Regular repo operations provide liquidity certainty even in an ample reserves framework and are useful in managing unexpected stresses; the ILTR has been a useful pressure valve and should continue. - The 6-month ILTR operations could be supplemented with regular shorter term repo operations (for example repos of less than a month to maturity) to support intermediaries’ capacity to channel relatively short-term repo funding to the wider market. - Short-term repo operations can be easily scaled up and down in response to sudden changes in precautionary liquidity demand and could be especially important as the BOE exits from asset purchases. - It is important to clearly communicate how BOE’s operational framework will be implemented through the Quantitative Tightening process. - The BOE’s market intelligence toolkit could be supplemented with more frequent data on Gilts and sterling corporate bond trading; the FCA’s bond market trading database is extensive but currently difficult to leverage for frequent market intelligence. - BOE and FCA should work together and invest resources to make bond trading data available in a useful form on a frequent (daily) basis to better inform decision making in stress situations. ### Supporting Liquidity Needs of the Non-Bank Sector (paragraphs 84–91) - The “dash for cash” showed transmission of liquidity to the wider NBFI sector was inefficient and exacerbated liquidity stress; rationing to NBFIs meant liquidity provided to intermediaries was not efficiently channeled to the wider market. - BOE interventions, especially large front loaded asset purchases, eventually flowed through to NBFIs but the inefficiency may have required larger and more protracted interventions than otherwise needed. - As most large U.K. NBFIs can’t directly access BOE liquidity, liquidity problems at large interconnected NBFIs manifest as market stress when they must sell assets or find lenders with available balance sheet capacity. - If intermediation is impaired, BOE’s only option may be asset purchases, which are effective but blunt and indiscriminate and result in significant long-term expansion of the BOE’s balance sheet. - BOE liquidity support should complement and not replace stronger regulation of NBFI liquidity management to ensure better functioning of core markets. - Objective of providing liquidity support to NBFIs: backstop market functioning as opposed to NBFI investors; support should focus on largest benchmark interconnected markets (Gilts and gilt repo markets, and perhaps FX swaps) and operate via participants most critical to core market functioning. - Not all NBFIs should be eligible for BOE backstops; only the largest and most interconnected entities with a significant presence in core sterling markets should be considered; framework must be flexible given NBFI diversity. - First-best policy: strengthen regulation and supervision to reduce liquidity mismatches and improve NBFI liquidity risk management frameworks; NBFIs generally lack prescriptive liquidity risk management regulations despite considerable liquidity risk mismatches. - Improving NBFI supervision and regulation is a significant global policy task; many NBFIs operating in sterling markets are domiciled and regulated elsewhere (notably MMFs dominated by Irish and Luxembourg funds). - Incorporating NBFIs into the BOE’s operational framework would broaden BOE options to manage future liquidity stress; allowing appropriately regulated and systemically interconnected domestic NBFIs (insurance companies, asset managers, pension funds) access to some BOE facilities would widen options to counteract stresses. - Objective of direct liquidity support to NBFIs: support markets, not idiosyncratic firm problems; resolution and other regulatory tools are more appropriate for firm-specific issues. - Both asset purchase operations and lending facilities are needed because some NBFIs can’t use leverage and hence cannot use a repo facility. - Central banks internationally have used both lending facilities (example: Primary Dealer Credit Facility in the United States) and asset purchase facilities (example: U.S. Money Market Mutual Fund Liquidity facility). - The BOE is co-leading international work to develop a framework and tools to provide liquidity to the NBFI sector and should develop both lending (through a Market Liquidity Facility (MLF)) and asset purchase operational tools to backstop appropriately regulated, large interconnected NBFIs. - The BOE should retain discretion on to whom and in what circumstances backstop liquidity might be made available, focusing on ensuring markets remain functional. - Significant role of foreign NBFIs in core Sterling markets needs to be factored into the BOE’s operational framework; some important NBFIs (especially Sterling MMFs) are not U.K. based or regulated. - The BOE should investigate options to provide support to such foreign entities provided they are adequately regulated. *Source: IMF Staff (excerpts from the supplied chapter content).* ### 92. There is considerable moral hazard in the status quo. A traditional concern governing the ### 1gbrea2022004 - 92. There is considerable moral hazard in the status quo. A traditional concern governing the ### Moral hazard in the status quo (¶92) - There is "considerable moral hazard in the status quo." - Traditional central bank operational frameworks limit access to central bank liquidity to banks, deposit taking firms, financial market infrastructures and large broker-dealers because they are "relatively tightly regulated" to manage moral hazard. - The adequacy of this traditional approach is questioned as market-based finance and the role of NBFIs have increased. - Central banks, including the BOE, have been more regularly providing market support via asset purchases; "Discretionary asset purchases" have been "frequently used" which has increased market expectations of their deployment in stress situations and thus encourages reliance and creates moral hazard. ### Need for a specific liquidity support framework for markets and NBFIs (¶93–¶94) - A more specific liquidity support framework could: - "circumscribe expectations of BOE support" and improve ex ante risk management decisions. - Replace or complement the BOE's current "flexible discretionary approach" which articulates broad policy objectives but is "not specific on the modalities of interventions (instruments, markets, maturities of instruments, counterparty access, pricing arrangements, collateral arrangements)." - Influence ex-ante risk management choices of market participants more strongly by reducing uncertainty over what the BOE could support. - Reducing discretion, particularly for "large interconnected NBFI sector," could: - Provide "stronger guidance to market participants and regulators." - Mirror the specificity in the SMF which aids liquidity planning and supervisory assessment. - Key aspects where ex-ante clarity could be useful include: - The markets and instruments included in support - The counterparties covered - The maturities of instruments eligible for support - The criteria and approach that will be used to exit from providing support ### Focus and characteristics of market support (¶95) - Market support should be focused on "the most central, critical benchmark liquidity and funding markets used to raise funding and manage risks." - Suitable candidate markets should be: - "liquid in normal times" - "of high credit quality" - "large benchmark markets" - In the U.K. context, "the Gilt repo and Gilts markets are the key markets of focus." - Focusing support on such markets and on "shorter term instruments" would: - Concentrate market and regulator expectations on instruments "more likely to be resilient to stress ex ante." - Facilitate defined exit criteria communicated ex ante to "better align market expectations of support with the BOE's short-term backstop role." - Reduce risks of liquidity mismatches and make BOE exits "faster" and "smoother," reducing the risk of permanently expanding the BOE's balance sheet and market footprint. ### Design of instruments and moral hazard mitigation (¶96) - "The design of instruments and facilities should reflect moral hazard mitigation concerns." - SMF facilities already embody this principle. - Backstops should "only be provided to entities that are adequately supervised" so "a low risk of liquidity mismatches may be expected to arise." - NBFIs eligible for access could be subject to "more prescriptive liquidity requirements" as a quid pro quo for BOE support. - Ex ante access fees are proposed as an option to: - "make a stronger link between ex post support and ex ante risk taking" - Tangibly crystallize the costs of providing liquidity insurance that NBFIs implicitly receive - Influence risk taking; "Costs can be reviewed as experience accumulates." - Existing principles and experience for pricing Committed Liquidity Facilities (CLFs) within the Basel III LCR framework in jurisdictions with a shortage of HQLA can be leveraged for BOE ex-ante access fees (¶96; footnotes 54–55). - Lending facilities should be "priced above normal market rates, but not so high as to discourage use in stressed conditions" to balance providing effective backstops without encouraging fire-sales of assets. ### Developments in Emergency Liquidity Assistance and Resolution Liquidity Frameworks (¶97–¶98) - Main development since the 2016 FSAP: introduction of the RLF. - Characteristics of the RLF: - "Separate from but sits alongside the ELA framework and outside the SMF." - Provides "a broad, scalable, and flexible tool to support the liquidity of a firm going through resolution." - BOE can provide liquidity in sterling and FX, "secured on a wide range of collateral, building on the collateral eligible in SMF operations." (¶97; footnote 56) - Provisions for the BOE to request an indemnity from HMT against losses. - Policy guiding RLF lending is "flexible to be tailored" to diverse resolution circumstances and aims to "encourage funding recipients to return to using market funding as soon as practical." - "Funding in FX is available." - The RLF "embodies most best practice principles that apply to ELA": - Robust design to provide flexible liquidity while managing significant risks. - Extensive governance arrangements and resolution planning provide authorities significant information on firm viability and timing of BOE liquidity needs. ### Appendix I — Selected status of 2016 FSAP recommendations (excerpt) - Recommendation 1: "Develop a set of cross-sector interconnectedness indicators..." — Status: Partly implemented. "Experimental statistics for flow of funds data have been produced" but "most of the flows for investment funds are coming from or going to unidentified 'unknown' sectors." - Recommendation 2: "Extend... scope of transparency reporting under the AIFMD to cover non-EEA managers and funds..." — Status: Implemented. "The U.K. authorities have extended AIFMD to non-EEA managers and funds that are marketed in the U.K." FCA shares data with BOE for financial stability purposes. - Recommendation 3: "Ensure that Broker Crossing Networks’ (BCNs) activities are sufficiently supervised and monitored." — Status: Implemented. "The FCA supervises Systemic Internalizers (including investment banks) that previously operated BCNs." - Recommendation 4: "Continue with the de-tiering project for payment systems and EUI..." — Status: Implemented. Several CCP members have become HVPS members; further review after RTGS renewal will assess case for more de-tiering. - Recommendation 5: "Establish an approach for engaging with countries that are not members of CMGs..." — Status: Implemented. CMGs established for LCH and ICEU; BOE engages non-CMG jurisdictions through other channels; remaining steps include finalizing resolution planning and more regular engagement. - Recommendation 6: "Assess the incentives created for CCPs in managing their liquidity risk..." — Status: Implemented. BOE conducted a liquidity risk assessment for CCPs in 2019 and followed up. - Recommendation 7: "Ensure that the level of PRA supervisory scrutiny over small and medium-size firms does not have an adverse impact on SMF risk management and ELA horizon scanning." — Status: Implemented. BOE proactively assesses firms and potential liquidity support needs; PRA assesses banks' liquidity risk via L-SREP. - Recommendation 8: "Complete a broad financial sector stress scenario to assess the aggregate exposure to liquidity insurance across the full range of SMF facilities." — Status: Implemented. BOE reviews capital setting scenarios annually, assesses risks quarterly, and initiated work in 2019 on a liquidity biennial exploratory scenario considering the full spectrum of operations including SMF facilities. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022004.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022004.pdf_