Risk Assessment: Liquidity and Collateral in 2022 and beyond

FinanceFeeds Editorial Team

After a year dominated by interest rates and market volatility, Joe Midmore, COO of margin analytics firm, OpenGamma, reflects on 2022 as the year liquidity risk management mattered, and looks ahead to collateral squeeze confronting markets in 2023.


Geopolitical events have caused persistent market volatility this year, as Midmore explains “the Russian invasion of Ukraine has had a significant impact on derivatives across all markets this year. However, it is the Energy market that has been affected the most because of the dependence on Russian oil and gas.” This has meant that “margins are now higher as a percentage of contract value, and with prices still being at record levels this is leading to a significant increase in margin requirements. Some firms are finding it difficult to fund their hedges and are consequently seeking assistance from unlikely sources such as private equity and central banks.” Anticipating the year ahead, “the worry is there could be a default that would disrupt the market even further in 2023.”

In the UK, “2022 saw what was effectively a black swan event for pension funds. The now infamous mini budget caused a fire sale, as some funds relying on liability driven investment strategies were forced to sell highly liquid assets (such as gilts) in a ‘dash for cash’, exposing a glaring blind spot for the industry to ponder – how to efficiently risk manage liquidity mismatches.”

Preparing for 2023, Midmore warns, “Capital efficiency and liquidity risk management are key themes that need to be on everybody’s radar when planning for 2023. Increasing interest rates and persistent market volatility will result in higher levels of margin being called at greater funding costs.
On the regulatory front, in-scope UMR phase 6 firms continue to use up their regulatory thresholds and some will find themselves needing to post initial margin for the first time fairly soon. The EU pension fund clearing exemption rules are also set to expire in June 2023 adding to the collateral liquidity challenges real money managers will need to find resolutions for.

In response to various market shaking events that have unfolded this year, we are also likely to see a big year for CCPs, with a greater emphasis on the role that clearing can play in the repo, FX and crypto derivative markets.

Ultimately, firms will need to have capital and liquidity risk management front of mind to build organisational resilience, while minimising the cost of trading.”

Joe Midmore, Chief Commercial Officer, OpenGamma
Joe Midmore, Chief Commercial Officer, OpenGamma

Joe Midmore is the Chief Commercial Officer at OpenGamma. Prior to OpenGamma, Joe spent 15 years at Credit Suisse in various Sales and Relationship Management roles across the Prime Brokerage and Prime Derivatives businesses.

Read this next

Institutional FX

Euronext reports double-digit growth in FX volume

Pan-European exchange, Euronext has reported a 10 percent rebound in the average daily volume on its spot foreign exchange market. The ADV figure stood at $19.6 billion in January 2022, which is up from December’s $18 billion.

Digital Assets

Voyager subpoenas FTX’s inner circle over Alameda loan

Bankrupt crypto broker Voyager Digital, represented by law firm Kirkland & Ellis, is seeking court approval to subpoena Sam Bankman-Fried’s inner circle, as well as Alameda Research’s former executives.

Retail FX

AvaTrade seals sponsorship deal with F1’s Aston Martin team

Dublin-based forex broker AvaTrade today announced that it has concluded a sponsorship deal with Formula One’s Aston Martin Cognizant team that entails sponsorship rights and other marketing benefits.

Executive Moves

M4Markets onboards Invaxa CEO Marios Antoniou as COO

Seychelles-regulated brokerage firm M4Markets has appointed Marios Antoniou, who has a colorful career within the foreign exchange industry, in the capacity of its Chief Operations Officer.

Digital Assets

GK8 now allows clients to control their digital assets as they would their fiat

“As the institutional market is increasingly turning to self custody, our policy engine empowers them to automate transactions, approvals, and even crucial workflows, while providing the highest degree of security, consistency, governance and control.”

Digital Assets

Retail CBDCs in the UK: “Welcomed” by CryptoUK and R3, but “Dystopian” for ETC Group

“At this stage, we judge it likely that the digital pound will be needed in the future. It is too early to decide whether to introduce the digital pound, but we are convinced preparatory work is justified”, said the BoE and HM Treasury.

Institutional FX

Centroid taps Iress API to provide retail brokers with real-time market data

“It has always been a challenge to have an efficient, elegant solution for market data and order execution for retail brokers, but with Iress we have found absolutely the right partner to add to our client offering.”

Digital Assets

Ramp launches FCA-approved off-ramp product, onboards Brave, Trust Wallet, Ledger

“To obtain and maintain our FCA registration, we must meet and operate within their strict anti-money laundering and counter-terrorist financing standards. This is a huge achievement for us, as compliance is a cornerstone of our business and what we stand for.”

Institutional FX

State Street launches FIX API for Fund Connect ETF platform

“Expanding from proprietary APIs to the FIX industry standard will bring us closer to our goal of 100% digital interactions. This is another example of innovations we’ve brought to our operating model as we celebrate 30 years of servicing ETFs since the launch of SPY.”