UK asset managers and pension funds now have guidance on managing risk when using leveraged liability-driven investments.
UK asset managers and pension funds now have guidance on managing risk when using leveraged liability-driven investments.
The guidance from the UK’s Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) comes in response to the September 2022 bond market meltdown, when UK financial assets saw severe re-pricing, particularly of long-dated government debt. The spike in yields triggered collateral calls and forced gilt sales that led to market dysfunction for firms with LDI strategies.
In a release, Sarah Pritchard, the FCA’s executive director of markets, said, “We have been closely monitoring asset managers using LDI strategies as they make improvements and the sector is now much more resilient to potential risks, but there is more to be done.”
The FCA guidance sets out what the FCA expects in terms of risk management, stress testing, and client communications, “so that the necessary lessons are learned from last September’s extreme events,” Pritchard said. The TPR guidance stresses the importance of having the right governance and controls in place to reduce risks and to react quickly to extreme events.
