Market Volatility and Liquidity Challenges: Expert Perspectives from the Luxembourg Risk Roundtable

On June 18^th 2025, we convened a risk roundtable in Luxembourg, gathering senior risk management professionals from leading firms to explore the evolving landscape of markets and their liquidity. The discussions focused on the challenges and opportunities presented by a tariff-driven financial environment. As market conditions continue to evolve, the insights exchanged during this session are invaluable for navigating the complexities of today’s financial markets.

Hosted by: 

• Kamil Zielinski – Financial risk expert / Key speaker
• Hugo Birch – Associate Director, FRA

• Magiel van de Groes – Executive Director, DVA

Event Overview:

Session 1: Topical Stress Scenario - Tariffs and US-China Trade Conflict

The session commenced with a retrospective examination of the U.S. tariffs introduced in early April and their potential implications for financial markets. Kamil Zielinski presented a stress scenario illustrating how these tariffs, coupled with a potential U.S.-China trade conflict, might affect a typical multi-asset portfolio. His presentation also included best practice recommendations for modelling predictive stress tests using the S&P Global Buy-Side Risk solution.

Participants recognized the significant challenge of converting macroeconomic predictions into actionable risk factors. They referenced macroeconomic scenarios published by S&P Global Ratings, raising inquiries about how to select the most accurate scenario and implement it effectively within a market risk framework. One participant pointed out the anticipated increase in geopolitical risks in the upcoming months, which led to further discussion among professionals regarding the data presented in the slides.

The consensus among the group was that the U.S. dollar is unlikely to recover swiftly from its recent decline, and treasury yields in the US are expected to remain elevated. This reflects broader concerns about ongoing global market volatility and the potential long-term effects of current trade policies.

Session 2: Liquidity Solutions - Fixed Income and Equity Methodologies

As the conversation progressed, participants delved into the complexities surrounding liquidity dynamics in financial markets. Kamil elaborated on the intricacies of liquidity risk and introduced the model behind the recently launched bond liquidity solution. He highlighted the challenges associated with collecting and processing trade and quote data from OTC markets, emphasizing the necessity for sophisticated proxy logic and continuous adjustment of model inputs to accurately reflect real-time market conditions.

Kamil further explained how the "delta-bits" approach effectively captures sudden liquidity shocks, offering a more nuanced alternative to traditional elasticity methods. This perspective resonated with the group, as they acknowledged the critical importance of proactive liquidity management in today's financial landscape. The consensus among participants was that developing robust liquidity models capable of learning from market behaviour is essential for effective risk management in the current environment.

The subsequent discussion focused on the implications of regulatory changes for liquidity risk management practices. Participants noted increased scrutiny from the Commission de Surveillance du Secteur Financier (CSSF) regarding liquidity models. The regulator has advocated for more rigorous assessments of reported liquidity figures and occasionally challenged models lacking sufficiently granular information. This highlighted the need for Managing Companies to stay abreast of evolving regulations and adapt their models to accommodate the growing amount of illiquid assets within their portfolios.

The discussion concluded with insights from several participants regarding how their firms navigate the complexities of liquidity risk in a rapidly evolving landscape. They shared various non-standard practices, including the calibration of time horizons through the selection of optimal Average Daily Trading Volume (ADTV) periods and the design of worst-case scenarios for liquidity of portfolios. The panel acknowledged that managing liquidity risk for both liquid and illiquid assets may necessitate distinct approaches, particularly due to the challenges associated with differing risk management strategies and scarcity of market data for illiquid assets.

As we reflect on the insights shared during the Luxembourg Risk Roundtable, it's clear that understanding market volatility and liquidity challenges is essential for effective risk management in today's financial landscape. The discussions highlighted not only the complexities posed by tariff-driven environments but also the innovative solutions emerging to address liquidity dynamics.

For those looking to deepen their understanding of these topics, we invite you to explore additional articles such as "Stress Scenario - Tariffs and US-China trade conflict" and "How Bad Were US Tariffs for the Liquidity of Corporate Bonds? ". These resources delve into the intricacies of market risk and liquidity management, providing valuable perspectives that can enhance your strategic decision-making.