Non-bank financial markets, such as money market funds, investment funds and pension funds need more resilience to cope with rising interest rates, according to The Bank of England (BoE).
The BoE made the statement in its July 2023 Financial Stability Report which also found that the risks from higher interest rates can also be amplified by investment managers deleveraging and rebalancing their portfolios.
The report states that there are “vulnerabilities in market-based finance which could become more apparent as interest rates continue to increase,” including liquidity challenges.
“There continues to be an urgent need to increase resilience,” the report adds. “Many firms involved in market-based finance are not regulated by the BoE, so we are working with other regulatory authorities to achieve this.”
Joe Midmore, chief commercial officer for OpenGamma, comments: “This report from the BoE highlights just how essential it is to get liquidity management right, especially when dealing with highly leveraged products.
“If pension funds are committed to pursuing investing strategies linked to derivatives, they need to ensure that they can identify liquidity requirements in a timely fashion. That way, they will be less likely to fire sales of assets in order to raise cash in future periods of volatility.”
Joseph Cordahi, strategy director at fintech NeoXam, says: “Large institutional investment managers hold huge systemic importance to the global economic system, with some of the world’s biggest asset managers falling very much into the ‘too big to fail’ category.
“Hedge fund and pension fund managers should not wait for central banks to come knocking at their doors, they need to act now and begin voluntary stress testing measures. This will not only equip them for regulation down the line, but will give them a competitive edge, which given the current climate, is crucial.”
