The UK Financial Conduct Authority (FCA) has published a speech by Sarah Pritchard, executive director of consumers, competition and international, on the FCA's approach to non-bank financial intermediation (NBFI) leverage. The FCA believes that the first line of defence against the build-up of systemic risk related to leverage use is NBFIs themselves appropriately managing their own investment risk. However, for NBFIs to effectively manage their risks related to leverage use, they need to have access to adequate data and information about the markets in which they operate and the risks to which they're exposed. The second line of defence is counterparty credit risk management. However, in recent stress episodes, counterparty credit risk management has often failed to prevent systemic risks from crystallising. Enhancing private disclosure between counterparties would give leverage providers more information about the overall risk exposures of their NBFI clients, allowing them to manage their counterparty risk more effectively. That said, if NBFIs are required to disclose too much information, this could reveal proprietary information about their investment strategies. The FCA consider that industry has an important role to play in establishing best practice and in developing solutions that can balance the interests of leverage users and providers to improve data availability, so that NBFIs and counterparty credit providers can continue to operate as the first and second lines of defence.
The FCA will be the third line of defence and must have the necessary data, systems and tools in place to effectively monitor NBFI leverage use from a systemic perspective. The FCA considers that there may be some targeted changes it could make to its data collection to ensure it is able to assess leverage use in a comprehensive and risk-sensitive manner. It will consider this as part of its upcoming AIFMD review.
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